NEW YORK (Reuters) - Goldman Sachs analysts said on Wednesday the U.S. Federal Reserve, once it begins to tighten monetary policy, would raise short-term interest rates faster and to higher levels than current market expectations.
The New York-based Wall Street firm, one of the 22 primary dealers that do business directly with the U.S. central bank, said it still expects the Fed’s first rate increase to occur in September 2015 due to tame domestic inflation and risks to the economy if it hikes earlier.
Goldman analysts in a research note published on Wednesday said the Fed’s neutral rate to support economic growth without stoking inflation is still about 4 percent.
“As a result, our view of the rates path further out in the forecast is now clearly above what the market is pricing and by a significant margin by 2017,” they wrote in their research note titled “Top Ten Market Themes for 2015.”
The Fed adopted a near zero interest rate policy in December 2008 during the heighten of the global credit crisis.
Given the improvement of the labor market in recent months, many investors have been anticipating the Fed would raise interest rates in 2015, although there have been varied views on the timing.
Minutes of the Fed’s most recent policy meeting in late October, released on Wednesday, reflected a complex discussion at the U.S. central bank. Some policy-makers at the meeting wanted a removal of the “considerable time” phrase on keeping rates near zero from their policy statement, while others thought the language was useful.
A number of Wall Street economists recently polled by Reuters forecast for a mid-2015 “lift-off” on a Fed rate move, while the futures market implied traders are pricing a rate increase a year from now. [FED/R]
Because of the Fed’s concerns about weak domestic price and wage growth, many analysts reckon the central bank would raise rates very gradually.
“Although we think the Fed will probably take the funds rate higher than the market expects, we also have a stronger view than many others that the tightening process will prove
manageable,” Goldman analysts said.
They said fears about higher U.S. rates hurting stocks and other risky investments and the economy might be overblown.
Reporting by Richard Leong; Editing by Meredith Mazzilli and Chizu Nomiyama