What will the Fed do in 2023?

- And: Could the Inflation Reduction Act be a game changer for reaching net zero? Enjoy some of the top intelligence from Goldman Sachs. --------------------------------------------------------------- In today's edition: - How U.K. small business owners are [navigating very uncertain times](. - Meet the entrepreneur who [runs a business with basketball star LeBron James](. - Oh, and enjoy our [special end-of-year quiz](. We'll be back with BRIEFINGS in January. Happy holidays! (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Fed hikes slow but will probably go higher While this week's Federal Reserve meeting went mostly as expected, policymakers had at least one surprise: They raised their projections for inflation despite recent encouraging news on rising prices, [according to Goldman Sachs Research](. The Federal Open Market Committee raised its fed funds rate by 50 basis points and increased its projection of the peak rate in 2023 by 50 basis points to 5-5.25%. Our economists continue to expect three additional rate hikes of 25 basis points each in February, March and May, for a peak funds rate of 5-5.25%. “We see the FOMC's overriding goal as continuing what it has successfully begun in 2022: maintaining a below-potential growth pace that steadily narrows the [jobs-workers gap]( economist David Mericle wrote in the team's report. The FOMC's median inflation projections rose to 3.5% (+0.4 percentage point) in 2023 and 2.5% (+0.2 percentage point) in 2024. Fed Chair Jerome Powell clarified that the projections reflected the softer-than-expected consumer price index (CPI) report for November. --------------------------------------------------------------- Will the Inflation Reduction Act get us to net zero? The U.S. Inflation Reduction Act (IRA), a sweeping climate, healthcare and tax bill, was signed into law earlier this year. [Senior leaders from Goldman Sachs discuss what the bill means for the U.S.'s decarbonization goals]( - [The IRA provides almost $400 billion]( of energy and climate spending over a 10-year period, according to the U.S. Congressional Budget Office, with about $270 billion of that coming in the form of new tax incentives for businesses and individuals to pursue and invest in cleaner and more efficient energy sources. - The world needs to see $1.8 trillion more in annual investment this decade to reach net zero by 2050, according to Brian Singer, the global head of GS SUSTAIN within Goldman Sachs Research. The IRA provides new incentives estimated by the government to average $27 billion a year over the next decade, though this is not an upper limit. Singer says it will “push forward the deployment of clean energy solutions.” - Rebecca Kruger, a managing director in the Natural Resources Group within Goldman Sachs Investment Banking, says the IRA is “significant” for some of the energy companies she advises. For many companies, she says, the bill is “shifting the world view on the art of the possible.” - Akif Irfan, a portfolio manager on the energy infrastructure and renewables team in Goldman Sachs Asset Management, says it's not simply the tax credits that stand out about the IRA, but the clarity the bill provides around those credits. "In some cases some tax credits have been extended for a decade or longer,” he says. - “The IRA won't get us to 100% on U.S. net-zero goals, and it's hard to picture any piece of legislation sitting here in 2022 that would have gotten us to a fully decarbonized economy,” Kruger says. “But this does move us significantly in that direction.” --------------------------------------------------------------- Finding opportunities in emerging market bonds Debt loads have risen sharply in emerging markets this year because of government responses to the pandemic and surging inflation. As a result, two emerging market debt experts at Goldman Sachs Asset Management [say some developing nations will struggle to raise capital in the coming year.]( But others appear more resilient and have large stockpiles of foreign currency. More broadly, the experts see opportunities through active management to earn higher investment returns in a new era for financial markets — one in which easy monetary policy is no longer lifting all assets. --------------------------------------------------------------- The outlook for US financial services Banks are often seen as a bellwether for the economy — so what do they tell us about the U.S. economic outlook? [In the latest episode of Exchanges at Goldman Sachs]( Goldman Sachs Research's Richard Ramsden and Alex Blostein discuss the state of indicators like lending, credit quality and liquidity, the implications of higher inflation and rates, asset allocation trends and the outlook for capital markets activity after a muted 2022. They also share the themes that were in focus at the recent GS U.S. Financial Services Conference. Above (L to R): Alex Blostein, Richard Ramsden and Allison Nathan of Goldman Sachs. - Tightening credit quality. “At the margin, banks are starting to tighten underwriting standards,” Ramsden tells Exchanges host Allison Nathan. “Rather than pulling back in terms of availability of credit, I think what most banks are doing is adjusting the price of that credit or the price of that loan to really compensate them for what they perceive the economic risk to be.” - Inflation impact. “Very simply, inflation has resulted in more loan demand over the last few years. So, as an example, if you go out and buy a used car today, it's probably going to cost 20% to 30% more than three years ago. Which means that the size of the loan is 20% to 30% larger than a few years ago,” Ramsden says. “There's a lot of focus around how inflation could impact credit quality, especially at the lower income cohorts for households.” - Focus on portfolio construction. “When we pivot to '23 and perhaps longer — with a less accommodative Fed policy — you could see much more focus on downside protection. I think probably more search for alternatives. And more ways to look for uncorrelated assets,” Blostein says. - Pick up in M&A? “One of the themes we've heard loud and clear from a number of large private equity firms is that the appetite for public-to-private transactions is definitely starting to pick up for the first time in quite a long period of time,” Blostein adds. “We're likely to see more public-to-private transactions. So that will help the M&A backdrop.” --------------------------------------------------------------- UK entrepreneurs share their stories on surviving another tough year In recent years, small business owners in the U.K. have faced the ripple effects of multiple crises, from the Covid-19 pandemic to the war in Ukraine. As a recession looms, small business owners must, again, plan to withstand a volatile economic climate while hoping to emerge stronger. At Goldman Sachs'[Resilient Business]( event in November, we heard from members of our 10,000 Small Businesses U.K. alumni [about how they have navigated the uncertainty]( - “My customers have less disposable income, which has reduced footfall and spend instore. [But] we can only focus on things within our sphere of control. I want to double down on what makes us different from other salons and that it is to show the diversity of people coming into my stores, so that [potential customers] can see themselves. And when things get better, we'll get people back in, in bigger numbers, and push our profits.” — Kaye Sotomi, co-founder of Chop Chop London, a haircare company. - “For us, it's about looking outside the box, finding new markets and not just concentrating on retail. We started working for building companies that create beautiful homes but are currently finding it more challenging to sell. We suggested adding a DeliVita pizza oven and creating an outdoor kitchen, which gives consumers added value.” — Joe Formisano, co-founder of DeliVita, a specialist pizza oven company. - “Our specialism is bringing large groups of people together in one space, which wasn't possible during the Covid-19 pandemic. One of our key skills is logistics planning for events and we realized that Covid-19 testing sites are essentially long events. That work kept the business afloat, kept the team together and got us through that period of uncertainty.” — John Tasker, director at events-management company Massive. --------------------------------------------------------------- Highlights from the 2022 Alternatives Summit: Opportunities in an Uncertain Environment A volatile and uncertain macro backdrop has left investors wondering how many times they will be faced with “once-in-a-lifetime” events. At the 21st annual two-day Alternatives Summit held at our global headquarters in New York, over 400 clients heard from 61 leading investors, economists, policy analysts, scientists, technologists and Goldman Sachs experts providing insights on the inflection points and disruptions driving markets today, as well as views into what lies ahead in 2023 and beyond. [Read the recap](. --------------------------------------------------------------- From playing high school basketball with LeBron James to running a business with him Maverick Carter has been described as the creative director of all things LeBron James. In [a recent episode of Talks at GS]( Carter shares his story of learning to play poker from his grandmother, working as a consultant at Nike and eventually establishing the SpringHill Company, an entertainment development and production company he co-founded with James. Above (L to R): Goldman Sachs' Kim Posnett and Maverick Carter of SpringHill Company. Carter has helped build a brand that prioritizes creativity. “We want to empower employees. We're an idea company…Creativity is at the center of what we do,” Carter tells host Kim Posnett. The SpringHill Company also endeavors to promote diversity across its business. Fifty percent of the company are women and 67% are people of color, according to Carter. “LeBron gave me an opportunity that empowered me to be more than what the world would ever see me as, right?” Carter says. “As a, back then, 22-year-old Black kid from the inner city in Akron,” he says. “And I still wake up every day wanting to prove that I am more than what the world would perceive me as or say I am every day. So that's what the company, that's one of the ethos that we're founded in.” --------------------------------------------------------------- BRIEFINGS brainteaser(s): End-of-year quiz As a special end-of-year treat, we bring you a twist to our usual quiz format. Five questions instead of one. Good luck! Q1) Since 2000, to the nearest hundred, how many stocks have been removed from the S&P 500? A) 100 B) 300 C) 500 D) 700 [Check your answer and take part in the rest of our end-of-year quiz.]( --------------------------------------------------------------- ICYMI: In the media [Bloomberg]( December 15 [Goldman says commodities will gain 43% in 2023 as supply shortages bite]( [CNBC]( December 14 [Efforts to tame inflation will ‘extend into 2024,' says Goldman Sachs (3:25)]( [CNBC]( December 11 [Goldman Sachs strategist explains why he likes high quality Japanese factory automation names]( (2:41) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. To the extent this newsletter includes material from the Goldman Sachs Global Markets Division, please [click here]( for information relating to Global Markets Division material and your reliance on it. To the extent this newsletter includes material from Goldman Sachs Asset Management, please [click here]( for additional disclosures. [Click here]( to unsubscribe. © 2022 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA --------------------------------------------------------------- [GS.com]( | [Careers Blog]( | [Privacy and Security]( | [Terms of Use]( [Twitter](