It ain’t over till it’s over.

Many analysts and media pundits assume that United States (US) interest rates will abate despite warnings from Fed Chair Jerome Powell that this might not be the case.

Former Treasury Secretary Larry Summers is forecasting a recession with inflation taking a greater grip on the US economy.

The acceleration and the rise in employment rates spell growing consumption which in turn leads to higher income levels in an overheating economy.

‘UNANTICIPATED HIKES’

Goldman Sachs economist Spencer Hill said: “We see a significant risk that consumption will grow at an above-potential pace in 2023, in spite of a likely rebound in the saving rate.

“If consumption growth indeed picks up to around +2.5 per cent this year and GDP growth is tracking closer to +2 per cent as a result, our rule of thumb implies that the Fed could approximately offset this by delivering an additional 50 basis points of unanticipated hikes – above and beyond market pricing – to a peak Fed Funds range of 5.75 – 6 per cent.

“This would exert 50bps of upward pressure on financial conditions and roughly 0.5 pp of downward pressure on 2023 GDP growth, other things being equal.”

Resurgent inflation and a continuing flow of positive jobs reports see the likelihood of at least three more interest rate increases in the coming months.

The Fed remains committed to bring inflation down to two per cent with it currently standing at 6.4 per cent.

“Powell is going to emphasise the Fed has more work to do. That the job is not done and they are going to keep at it until the job is done. The Fed has been whipsawed by the data,” said Senior Economist at MacroPolicy Perspectives, Laura Rosner-Warburton.

LARGER INCREASE IN FUNDS RATE MAY BE REQUIRED

Spencer Hill, of Goldman Sachs, continued: “In the blue-sky scenario where consumption, manufacturing and housing  all accelerate-which is further from our base case- the underlying strength in demand would threaten to raise 2023 GDP growth to +2.5 per cent.

“In that world, an even larger increase in the funds rate might be required to keep demand growth below potential and labour market rebalancing on track.”

In a note, Goldman Sachs surmised: “While a step down to 25 bps is still possible in May, we no longer view it as the baseline… and maintain our view that the Governing Council will maintain the peak rate until the fourth quarter of 2024.”