The spread of the Omicron variant will fuel further bullish pressure on inflation, which could force Jerome Powell’s Fed to raise fed funds rates more than four times over the course of 2022. David Mericle said he expected. Goldman Sachs economist, in a note issued a few days before the upcoming meeting of the FOMC – the monetary policy arm of the Fed -, which will begin tomorrow January 25, to end the day after tomorrow January 26.
“Our base scenario is four (monetary) squeezes in the months of March, June, September and December – wrote Mericle, in the note reported by the CNBC website – But we see the risk that the FOMC decides to act restrictively in each of the scheduled meetings (scheduled), until the inflation picture changes “.
Markets are pricing in a first squeeze at the March FOMC meeting: in that case, it would be the first rate hike since December 2018. Traders price the rate hike in March with a probability of almost 95 %, and in general four monetary squeezes in all of 2022 with a chance of more than 85%, according to data from the CME. Expectations, thanks to the growth of inflation at the strongest pace since 2022, are however becoming increasingly bullish, so much so that the probability of seeing five rate hikes, again according to the FedWatch parameter of the CME, has risen to almost 60%.
Regarding the Fed’s balance sheet reduction, Goldman Sachs expects the process to begin in July, with a central bank bond cut that will increase by $ 100 billion each month, to be completed over a period of two to two and a half years. . The disposals should drive the Fed’s balance sheet to a still very high value, ranging between $ 6.1 and $ 6.6 trillion. The Fed will likely continue to reinvest repayments of maturing bonds, rather than proceeding with a direct disinvestment of assets, according to Goldman Sachs economist.