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Portfolio > Economy & Markets > Economic Trends

Goldman Sachs: Build Back Better Won't Pass

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What You Need to Know

  • The expectation from Goldman economists led them to lower their GDP forecast for 2022.
  • No word yet on whether Goldman will downgrade its relatively bullish 2022 stock market forecast.
  • Goldman economists expect three Fed rate increases in 2022, 2023 and 2024, and one in 2025.

Goldman Sachs economists do not expect the Senate to pass President Joe Biden’s Build Back Better Act, and they have reduced their forecast for 2022 GDP growth as a result.

The firm now expects GDP will grow just 2.4% on a Q4/Q4 basis and 3.5% on a full-year basis, down from expectations of 2.9% and 3.8% released just weeks ago. Its early December forecast was also a downward revision from earlier expectations.

The firm’s latest GDP downgrade is based on expectations that without passage of the $1.75 trillion BBB package, spent over 10 years, federal spending will fall from 6% currently to between 1.5% and 2% by the fourth quarter of 2022.

Goldman notes, however, that Congress “is likely to approve some new spending in 2022, though most of it would occur over the next several years.”

Will Goldman Downgrade Its Bullish Forecast?

No word yet if Goldman’s downgrade of economic growth will lead to a downgrade of its stock market forecast for 2022, which is one of the highest on the Street.

Goldman strategists led by David Kostin set a target of 5,100 for the S&P by year-end 2022 in mid-December. That equated to a 10% gain at the time. Now, 5,100 is just 6.3% above the index current level in mid-Tuesday trading.

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.


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