Goldman Sachs is adding another 25 basis points to its estimated terminal rate cycle, despite recent momentum in the market that hoped for less aggression from the Federal Reserve after inflation data showed signs of slowing down in October.
The investment bank said that it continues to expect a 50bp hike in December and 25bp hikes in February and March 2023. The firm now added a 25bp hike in May, bringing its terminal fed funds rate to 5-5.25%, compared to 4.75-5% in the previous forecast and a 4.9% peak in market pricing.
Goldman Sachs saw the risks to its Fed forecast as tilted to the upside, for three main reasons. First, more rate hikes might be needed to keep the economy on a below-potential growth path now that the fiscal tightening has mostly run its course and household real disposable income is rising again. Second, inflation is likely to remain uncomfortably high for a while, which could put pressure on the FOMC to deliver a longer string of small hikes next year. Third, a deceleration in the pace of tightening or an overreaction to better inflation news could cause a premature easing in financial conditions that the central bank might have to counteract.
In addition, the U.S. Consumer Price Index (CPI) for October surprised the market after an increase of 0.4% for the month and 7.7% from a year ago, which were lower than estimates. The consensus expected an increase of 0.6% for the month and 7.9% from last year.
Core inflation which excludes volatile food and energy costs rose 0.3% for the month and 6.3% on an annual basis. Both figures were also lower than the consensus for 0.5% and 6.5%.