Goldman Sachs Expects Four Rate Hikes in 2022. It’s Not All Bad News for Stocks.

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The Marriner S. Eccles Federal Reserve building

Stefani Reynolds/Bloomberg

Goldman Sachs now expects the Federal Reserve to hike interest rates four times in 2022 and said the central bank could begin its balance sheet runoff as early as July.

Bond yields surged last week after the Fed’s December minutes signaled the possibility of a rate hike in March and revealed discussions to reduce its $9 trillion balance sheet. The yield on the 10-year Treasury note rose 27.3 basis points to 1.769% last week through 3 p.m. ET Friday, the biggest weekly gain since September 2019. The yield ticked higher again early Monday nearing 1.78%.

The minutes also led Goldman’s chief economist Jan Hatzius to add an extra hike in December to previous forecasts for hikes in March, June and September. “Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” he said in a note late Sunday.

He also cited the Federal Open Market Committee (FOMC) discussions around the central bank’s balance sheet, which conveyed “a greater sense of urgency than we had expected.”

Goldman now sees the balance sheet runoff beginning in July, earlier than its previous forecast of December, but said it could be even sooner than that. “With inflation probably still far above target at that point, we no longer think that the start of the runoff will substitute for a quarterly rate hike,” Hatzius said.

It’s not all bad news for equities though, which have been hit by rising bond yields in recent days. The bank’s rates strategists see the upward trend in bond yields slowing in the coming weeks: “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.”