Goldman Sachs adds another Fed rate hike to its forecast

The Fed already has raised interest rates 3 percentage points since March, putting the federal funds rate at 3% to 3.25%.

Some economists and investors expect the Federal Reserve to soon pivot away from its interest-rate-increase campaign, as they anticipate inflation will recede and the economy will slump.

But Goldman Sachs economists feel otherwise. They just added an additional rate hike to their forecast – a 25-basis point (0.25 percentage point) increase in March 2023.

Rising interest rates make your borrowing, such as mortgage loans, more expensive. But they increase the payout on your fixed-income investments, such as bonds, certificates of deposit and money-market funds.

The Fed already has raised rates 3 percentage points since March, putting the federal funds rate on overnight interbank loans at 3% to 3.25%.

Goldman economists expect another 0.75 percentage point on Wednesday. At that point Fed Chairman Jerome Powell will likely "hint" that the Fed will go another half point in December, they said.

Then the economists expect a quarter point in February and now an additional quarter point in March. That would leave the fed funds rate "peaking" at 4.75% to 5%, they said.

Rationale for Another Increase

"We see three possible reasons why the [Fed] could end up hiking past the February meeting," they said.

1. "Inflation is likely to remain uncomfortably high for a while, which could make continuing to hike in small increments the path of least resistance." Consumer prices soared 8.2% in the 12 months through September.

2. "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 real income is growing again." Personal spending rose 0.6% in September. And the economy expanded 2.6% in the third quarter.

3. "The [Fed] might need to do more if a future pivot causes a premature easing of financial conditions." the economists said. So to avoid that, the hikes will last through March, the economists predicted.

You might wonder what this scenario means for the stock market. What follows is my own thinking, not Goldman's.

As long as rates are rising, stocks should suffer because higher rates put pressure on the economy and earnings.

Even when the Fed stops lifting rates, stocks might continue to fall or stagnate, as the Fed will presumably end its hikes because its prior moves weakened the economy. And a weaker economy means weaker earnings.

Roubini's Concern of Fed

Nouriel Roubini, emeritus professor of economics at New York University, is worried the Fed will abandon its rate increases too quickly.

"Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation," he wrote in a commentary on Project Syndicate.

"There is good reason to doubt their willingness to do whatever it takes to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash," he said. The Fed's inflation target is 2%.