Goldman Sachs strategists predicted in a November 25 note that higher-than-expected inflation would push the Federal Reserve to accelerate the pace of phasing out its massive bond buying program in an attempt to ease price pressures.
At their most recent policy meeting in early November, Fed officials said they would begin to cut the central bank’s monthly purchases of Treasury and mortgage-backed securities by $ 15 billion a month, bringing them to zero within eight months. – the so-called “cone” completion in June. At the same time, the Fed’s policymakers have left the door open for a faster recession in case of signs that higher inflation will become a more permanent part of American life.
Recently released minutes from the November 2-3 Fed meeting show policymakers are concerned about continued price pressures, soften their tone on “transition” inflation, and acknowledge the growing risk that future inflation expectations could become unpinned, potentially leading to changes in spending patterns and higher wage requirements.
While Fed officials felt that the increased price pressures were mainly due to production bottlenecks and other factors that they believed were temporary, they agreed that they should be less convincing in justifying “temporary” inflation, while promising use the levers of monetary policy. to try and tame higher prices if inflationary pressures intensify.
Following the publication of the minutes, Goldman Sachs now predicts that continued inflationary pressures will force the Fed to double its rate of contraction to $ 30 billion a month starting in January, pushing the schedule to mid-March.
“The increased willingness to accelerate the gradual decline likely reflects both slightly higher-than-expected inflation over the past two months, and greater satisfaction from Fed officials that the faster pace is not shocking financial markets,” Goldman analysts said. Sachs in a note to customers.
Despite the accelerated schedule of cuts, Goldman expects the Fed to start raising interest rates only from June, a total of three times in 2022. The investment bank is one of a handful of large financial institutions that recently raised their expectations of interest rate hikes in the next year from two to three.
This is due to the fact that a number of economists, including several advisers from the Obama era, have targeted the Biden administration and the Fed due to the inflationary surge.
Stephen Rattner, head of the Automotive Working Group under former President Barack Obama, recently became Obama’s latest economic aide to sound the inflation alarm, asking in an article how the Biden administration could tackle “this critical issue in a wrong way” and warns that his Build Back Better program could exacerbate inflationary pressures.
Prior to that, former Treasury Secretary Larry Summers, who sounded the alarm early on the current price rises, told CNN in an interview that he believed the labor market was tight and monetary policy was too loose.
“We have to admit that our problem is not that not enough people have jobs,” Summers told the publication. “The current problem is that we are pushing demand into the economy faster than supply can grow, and that we will get more and more inflation until we stop doing it,” he said.
Summers called for a faster cut in the bond-buying program, calling for it to phase out in three months, not eight, as the current schedule for the Fed’s $ 15 billion a month cut suggests, or five as Goldman predicts.
Inflation has emerged as a key concern amid the economic recovery from the pandemic, rising faster than wages and eroding American purchasing power. It also posed a problem for the Biden administration, which recently switched to dumping 50 million barrels of crude oil from strategic national reserves in an effort to bring down high gasoline prices.
Reuters contributed to this report.