Goldman Sachs raises its Fed rate hike forecast to 75 basis points for September as Fed officials push hawkish messages

• Goldman Sachs raised its forecasts for the size of Fed rate hikes at the September and November meetings.
• The investment bank late Wednesday said it now sees a September increase of 75 basis points and a November increase of 50 basis points.

Goldman Sachs raised its forecasts for interest rate increases at the Federal Reserve's next two meetings as monetary policy makers have been asserting the view that more rate hikes are needed to bring down inflation.

The investment bank now expects the Federal Open Market Committee to raise the Fed Funds target by 75 basis points in September and by 50 basis points in November. It previously projected increases of 50 and 25 basis points, respectively.

"[Fed] officials have sounded hawkish recently and have seemed to imply that progress toward taming inflation has not been as uniform or as rapid as they would like," Goldman Sachs chief economist Jan Hatzius said in a late Wednesday note.

He also outpointed a Wednesday report by The Wall Street Journal that said the Fed appears to be on a path to raise interest rates 75 basis points this month following Chairman Jerome Powell's pledge to reduce inflation even if it increases unemployment.

The WSJ report is "a likely hint from the Fed leadership" that a three-quarter-point percentage increase will take place at the September 20-21 meeting, said Hatzius, adding that hawkishness is overriding the case for slowing the pace of tightening that Powell outlined at the July meeting.

Goldman expects another rate hike in December, 25 basis points, which would bring the Fed Funds rate to a range of 3.75% to 4% by the end of 2022. The Fed has already raised interest rates four times, to a range of 2.25% to 2.5%. The Fed raised its key rate by 75 basis points at its past two meetings.

Powell reiterated his anti-inflation message on Thursday at the Cato Institute's 40th Annual Monetary Conference. "I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done," Powell said, according to CNBC.

Fed Vice Chair Lael Brainard has also been among the Fed's hawkish voices. "We are in this for as long as it takes to get inflation down," she said in a speech in New York on Wednesday. Cleveland Fed President Loretta Mester also spoke on Wednesday. "I'm not even convinced that inflation's peaked yet," she reportedly said on a Market News International webcast.

Markets are now pricing in a rate hike path of 75-50-25 points for the next three meetings, Goldman Sachs said, adding that its own financial conditions index has tightened on the hawkish shift in expectations.

"This should be enough to keep growth on a solidly below-potential path in the second half of 2022. How the drag from tighter financial conditions will net out with other key growth impulses in 2023 is more uncertain, and we could imagine the hiking cycle extending beyond this year," said Hatzius.