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Goldman Sachs and JPMorgan Chase are sticking with forecasts for the Federal Reserve to hike interest rates five more times by the end of 2019 even as financial markets shudder.
In reports released in the past 24 hours as the Standard & Poor’s 500 index tumbled toward a correction, economists at the Wall Street giants predicted Chairman Jerome Powell and colleagues will raise their benchmark interest rate again in December, ultimately reaching 3.50% by the end of next year.
“Central banks will deliver more tightening than markets currently anticipate,” the JPMorgan economists led by Bruce Kasman wrote.
A decline in unemployment to 3.3% and an increase in the Fed’s favored measure of inflation to 2.3% will drive the Fed to push up its benchmark from the current level — a range of 2% to 2.25%, they said.
At Goldman Sachs, Jan Hatzius’ team said there is a 90% probability of a December hike and that risks around the call for four increases in 2019 are “broadly balanced.”
While acknowledging the recent selloff in stocks, the Goldman Sachs economists said a review of market declines since 1994 suggested the Fed only turned accommodative when other measures of financial conditions also deteriorated substantially or economic growth fell below its long-term trend.
“While credit spreads have widened somewhat recently, growth remains significantly above potential today,” Goldman Sachs said.
Investors are more doubtful of whether the Fed will be so aggressive. Economists at Morgan Stanley are among those who only see two hikes in 2019 after the December increase. Bloomberg Economics sees three increases next year.