Goldman Sachs: Build Back Better Won't Pass

Inflation Expectations

Despite the downgrade in their GDP forecast, Goldman economists, led by Chief Economist Jan Hatzius, expect inflation will continue to rise next year, but at a much slower pace. They forecast core PCE (personal consumption expenditures), which excludes volatile food and energy prices, to end 2022 at 2.5%, down from 4.7% currently, and core CPI (consumer price index) to peak at over 6% and end 2022 at 3.5%.

Inflation in the goods sector will continue to rise for several months due to supply-demand imbalances, then moderate as “stay-at-home and stimulus effects fade” slightly though the imbalances could continue “well into 2023.” Competition should help bring down prices, according to Goldman.

Inflation in the services sector is seen rising even longer due to increases in home prices and rents, though that will be offset somewhat by moderation in prices for travel, medical and financial services.

Goldman economists are also forecasting that short-term inflation expectations will decline from current “very high levels” next year “as long as the economy avoids a further succession of large inflationary supply shocks next year,” while long-term inflation expectations move slightly higher to the upper end of the Federal Reserve’s target, close to 2.15%.

Three Fed Rate Hikes a Year

The firm is calling for three Fed interest rate increases in 2022, 2023 and 2024 and one in 2025, eventually pushing up the Fed Funds rate to the 2.5%-2.75% range.

The first rate increase is forecast for the Fed’s March 2022 meeting, when the central bank will have finished tapering its asset purchases. In the fourth quarter, the Fed will likely start reducing its almost $9 trillion balance sheet, according to Goldman.