The US economy is heading into next year with strong momentum that is likely to boost wages and inflation more broadly, requiring the US Federal Reserve to raise interest rates four times next year, Goldman Sachs Group Inc economists said in a research note.
The New York-based investment banking and securities firm raised its growth outlook for next year to 2.5 percent and lowered its forecast for unemployment to 3.7 percent by the end of next year, said Goldman chief economist Jan Hatzius, a coauthor of the note, which was released by email on late Friday.
Before the latest revision, the most recent Goldman Sachs forecast for next year’s growth was 2.4 percent, forecasts compiled by Bloomberg showed.
The US jobless rate, which was 4.1 percent last month, could reach 3.5 percent in late 2019, Goldman predicted. That would be the lowest level since the late 1960s.
“Our projections would imply an evolution over the current cycle from the weakest labor market in postwar US history to one of the tightest,” the economists said in a summary of their report. “We expect that a tight labor market and a more normal inflation picture will lead the Fed to deliver four hikes next year.”
That is one more rate increase than the median forecast by Fed officials and more than financial markets are currently pricing in.
One of the reasons why the Goldman Sachs economists said they disagree with market expectations is “we see little evidence that soft inflation is structural in nature.”
Core inflation should accelerate, rising by about a half percentage point to 1.8 percent by the end of next year, Goldman said.
The Fed has raised its target range for the federal funds rate four times since December 2015 and futures trading indicates another quarter percentage-point increase is likely again next month, at the final US Federal Open Market Committee meeting for this year.
The risk of a recession in the US in the near term “still looks fairly limited,” Goldman wrote. “But the strength is becoming ‘too much of a good thing’ and containing further overheating will become a more urgent priority in 2018 and beyond.”
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