Over the weekend, Goldman Sachs
Goldman joins a growing chorus of financial institutions and Fed watchers who expect the central bank to take more aggressive action regarding inflation, which sits at a near 40 year high.
Meanwhile, the release of minutes from the Fed's December policy meeting sent bond yields soaring last week. The yield on the 10-year treasury climbed 27.3 basis week over week, the largest weekly spike since September 2019.
The Fed's December minutes noted a "tight labor" market as grounds for a potential near-term rate increase and sooner than expected sell-off of the trillions in securities it purchased over the pandemic. The Fed's minutes lead to markets pricing an 80% chance of a rate hike as soon as March.
Goldman revised its predictions on the same grounds over the weekend. The Fed has become "more sensitive to upside inflation risks and less sensitive to downside growth risks" in light of the strong labor market, wrote Goldman's chief economist Jan Hatzius in a note on Sunday.
With December's unemployment rate sitting at 3.9%, well within the roughly 4% threshold of what the Fed terms "maximum employment," the Fed can take a more aggressive stance when it comes to inflation, Hatzius argues.
Hatzius advanced his timeline for the Fed's planned sell-off of its balance sheet from December to July, noting, "With inflation probably still far above target at that point (July), we no longer think that the start of the runoff will substitute for a quarterly rate hike."
In other words, the Fed's selling off its assets to bring down bond prices and therefore raise rates, may not be enough to stave off inflation.
Indeed, December's Consumer Price Index data showed a 7% increase in prices year over year, the largest such increase since 1982. Meanwhile, as the economy sits at or near "maximum employment," hourly wages climbed 4.7% in December, year over year, significantly higher than 2019-2020's 2.9% increase. These dual conditions: rising inflation and rising wages may necessitate the Fed to take more drastic action to curb the supply of money, Goldman and other analysts contend.
"Risks [are] skewed toward stronger inflation and more rapid policy rate increases," wrote Citigroup
As far as bond yields go, which have roiled tech stocks this week, Goldman's analysts see a cool down in the coming days.
"This might allow stock prices - which are often more sensitive to changes in bond yields than to their level - to recover some of their lost ground," Hatzius writes.
Indeed, Goldman's predictions largely bore out. The yield on the 10-year note cooled down from Monday's 1.8% high to a more balmy 1.74% at the time of writing. Meanwhile, the broader stock indexes largely regained their footing this week. Nevertheless, markets remain turbulent as investors weigh the safety of higher yields against riskier returns from stocks.
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- 5.https://www.wsj.com/articles/economys-fate-might-hinge-on-question-of-full-employment-11642081833