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Goldman Sachs expects the Federal Reserve to raise interest rates five times in 2023, and forecasts that the US central bank is keen to raise its funds rate above the current neutral estimate.

The Fed hiked rates for the first time since 2018 last week and laid out an aggressive plan to push borrowing costs to restrictive levels next year, in a pivot from battling COVID-19 to countering the economic risks from excessive inflation and the war in Ukraine.

The Federal Open Market Committee (FOMC) raised the target federal funds rate by a quarter-percentage-point.

Goldman Sachs to exit Russia

GS economist Jan Hatzius expects the FOMC to hike at every meeting through Q1 of 2023 and slow to a quarterly pace in Q2 of 2023, on stronger growth outlook and signals that Fed officials are keen to raise the funds rate above their neutral estimate.

Hatzius also maintained his forecast of seven 25 bps rate hikes in 2022, according to a note dated Sunday.

"We continue to see meaningful risk of a 50 bps hike at some point that would lead the policy rate to reach our terminal forecast (of 3%-3.25%) sooner," Hatzius said.

GS economists also expect real household income to grow by 0.5% on a Q4/Q4 basis in 2022.

"The largest headwinds to real spending growth in 2022 are the pullback in government transfer payments and high inflation that will weigh heavily on real income growth," the brokerage said.

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