Goldman brings forward forecast for timing of ’17 Fed rate rises

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Goldman Sachs has moved forward its forecast for the timing of Federal Reserve rate increases this year after Friday’s upbeat jobs numbers.

The US added 235,000 jobs in February and saw an increase to wage inflation.

“We now look for funds rate increases in March, June, and September (compared to March, September, and December previously),” Goldman’s economists said.

The investment bank now expects the Fed to begin the process of normalising its balance sheet in the fourth quarter of this year, from mid-2018.

Goldman still expects three rate increases in 2017, in line with forecasts from the Fed from its meeting in December 2016, but said it was a “close call” under its models as to whether the central bank will raise rates four times.

Through the Fed’s large asset purchase programme after the financial crisis, known as quantitative easing, it has built up a sizeable balance sheet of assets like mortgage bonds and Treasuries. There has been growing talk that the Fed will soon begin to trim the size of its balance sheet, effectively causing selling pressure and having a similar effect on the market as raising interest rates.

The first step is likely to be ending reinvestment of the payments it receives on the assets it holds.

“For a variety of reasons—including considerations around the transition to a new Fed Chair in 2018—we see earlier balance sheet normalization as slightly more likely than a fourth funds rate increase,” said the Goldman economists.

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