According to Goldman Sachs Group Inc., the Federal Reserve will likely raise interest rates four times this year and begin the balance sheet runoff process in July, if not sooner.

In a research note, Goldman's Jan Hatzius said that rapid progress in the US labour market and hawkish hints in minutes from the Federal Open Market Committee on December 14-15 suggest a faster normalisation.

"As a result, we're moving our runoff projection ahead from December to July, with risks leaning to the even earlier side," Hatzius said. "With inflation still likely to be far above goal at that point, we no longer believe that the start of runoff will serve as a substitute for a quarterly rate hike. We're still seeing hikes in March, June, and September, and we've added a hike in December."

Goldman Sachs - Smart Energy Decisions

Fed officials indicated in their December meeting minutes that they are preparing to tighten monetary policy faster than they did the last time to keep the US economy from overheating amid high inflation and near-full employment. These conditions, along with a larger balance sheet that suppresses longer-term borrowing rates, "may warrant a possibly faster pace of policy rate normalisation," according to the minutes.

According to the minutes, officials also saw the timing of reducing the $8.8 trillion balance sheet as "closer to that of policy-rate liftoff than in the committee's past experience." Last month, the unemployment rate in the US dipped below 4%, while wages increased, reflecting a tight labour market.

The terminal funds rate is expected to remain constant at 2.5%-2.75%, according to Goldman Sachs. "Our path for the funds rate is only moderately above market pricing for 2022, even with four hikes," Hatzius wrote, "but the gap grows significantly in later years."