Global investment bank Goldman Sachs is now predicting that there could be as many as seven interest rates in 2022. What could this mean for the (ASX) share market?
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Interest rate prediction
Goldman Sachs now thinks that the US Federal Reserve is going to need to increase the interest rate even faster, according to reporting by Bloomberg. It was previously thinking that there would be five interest rate hikes.
Why the big change?
The inflation picture continues to change rapidly. The US consumer price index report for January came out, showing a 7.5% annual increase. It isn't been this strong for four decades. Inflation is widespread in numerous areas like food, energy, household furnishings and health insurance.
Is a 0.50% hike coming next month?
There has been a lot of talk about how much the US Federal Reserve is going to increase interest rates this year. An increasingly important question is – should the Fed increase the rate by 0.50% as its first move?
Goldman Sachs doesn't think so. Instead, the investment bank's economists believe that the Federal Reserve is going increase the rate in seven meetings in a row.
There is lots of inflation and wage growth, with more expected. But from what Goldman Sachs has seen, policymakers seem to be indicating that steady moves will be the most likely choice:
Most Fed officials who have commented have opposed a 50 basis points hike in March. We therefore think that the more likely path is a longer series of 25 basis points hikes instead.
Whatever happens, the (ASX) share market could be in for a bumpy ride in 2022.
However, there are still other economists and prominent financial people, such as the former US Treasury Secretary Lawrence Summers, that think interest rates could jump 0.50% in March.
Why do interest rates matter so much?
Magellan Financial Group Ltd (ASX: MFG) has a very relevant quote from Warren Buffett at the 1994 Berkshire Hathaway annual general meeting, where he said about interest rates:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
Time will tell what this means for the (ASX) share market. And indeed most assets.
