VIEW: Goldman Sachs Adjust Fed Call

Late on Friday Goldman Sachs noted the following: "We are pulling forward our forecast for the Fed's first rate hike by one full year to July 2022, shortly after tapering is scheduled to conclude. We expect a second hike in November 2022 and two hikes per year after that. However, the range of possible outcomes is wide, especially in the longer term. The main reason for the change in our liftoff call is that we now expect core PCE inflation to remain above 3% - and core CPI inflation above 4% - when the taper concludes. Sequential core inflation should be lower at that point but still around 2%, with shelter running hot. Taken together, we think this will make a seamless move from tapering to rate hikes the path of least resistance."

• "The biggest complication is the guidance in the FOMC statement that even the first rate hike requires maximum employment. However, with inflation far above target, unemployment likely below the median participant's 4% NAIRU estimate, and job availability high, we think the committee will conclude that most if not all of the remaining weakness in labor force participation is structural or voluntary."
• Goldman goes on to state: "We maintain our view that growth will slow to a trend-like pace and inflation will drop to the low 2s by late 2022 or early 2023, without an aggressive monetary policy response. The key reasons are that the level of fiscal support will continue to decline sharply and supply chain problems should be resolved, turning the inflationary surge in the goods sector into a temporary deflationary drag. As a result, we see the possible paths ahead as bimodal: if something delays liftoff long enough for growth and inflation to fall sharply by end-2022, the Fed could stay on hold for a while. This was the scenario we previously envisioned."
• They also note that "beyond 2022, we forecast one hike every six months. We see this pace as plausible either as a dovish response if inflation remains modestly above 2% or as an average outcome if inflation fluctuates above and below 2%."