Goldman: Higher Rates Could Spur Stock Sell-Off

A more aggressive Federal Reserve stand on interest rates could cause a steep stock sell-off, Goldman Sachs warns in a Thursday client note, CNBC reports.

“If the Fed reaccelerates, and policy tightening once again becomes front-loaded, we think yields could remain under upward pressure, risky assets could sell off more sharply, commodities could resume their declines, and the Dollar could move even higher,” said Goldman economist Jenny Grimberg.

An added risk is the potential for a boost in economic activity later this year, would would mean further tightening, Goldman said.

“The risk of a U.S. growth reacceleration this year as the impact of last year’s fiscal and monetary policy tightening fades may lead the Fed to hike even more, in our view,” Grimberg said.

“We think consumer spending in particular could drive such a premature reacceleration, as we see significant risk that consumption will grow at an above-potential pace in 2023,” Grimberg continued.

In line with the rest of Wall Street, Goldman is now forecasting a peak Fed funds rate of 5.5%-5.75%. However, the October Fed funds futures contract pins the terminal rate at 5.665%.

Federal Reserve Chairman Jerome Powell testified before Congress Tuesday and Wednesday that he expects the Fed will push interest rates higher than it originally thought necessary to tamp inflation down to its target of 2%.

That has traders now expecting the Fed to move interest rates up by 0.50% when it next meets March 21-22. CME data puts a 50 basis-point hike at a 81% probability.