(Bloomberg) -- Goldman Sachs Group Inc. has added a quarter percentage point to its forecast for the peak in the Federal Reserve’s benchmark interest rate, thanks in part to the likelihood of inflation remaining “uncomfortably high” for some time.

The bank’s economists, led by Jan Hatzius, said in a note to clients on Wednesday that they now anticipate the Fed boosting the key rate to a range of 5% to 5.25%, up from the previous call of 4.75% to 5%. 

Goldman sees a 50 basis-point increase in December, followed by three 25 basis-point boosts in February, March and May.

The team sees a bigger burden on monetary policy to restrain price increases in part because “fiscal tightening has mostly run its course,” the note showed. Government spending has tumbled this year as pandemic-relief programs concluded. But with household incomes now climbing again, “there is some risk that consumer spending could reaccelerate too much,” the economists said.

“Inflation is likely to remain uncomfortably high for a while, and this could put pressure on the FOMC to deliver a longer string of small hikes next year,” the economists also said, referring to the Federal Open Market Committee, which sets interest rates.

Excessive Exuberance

The third dynamic cited by the team was the potential for over-exuberance in financial markets, thanks in part to enthusiasm over the coming deceleration and ultimately end of Fed tightening.

“There is some risk that the equity market could rally” as the Fed steps down, the note said. The loosening in financial conditions that occurred after the weaker-than-expected October consumer-price index report last Thursday showcased “the risk of an overreaction” in markets, it said.

Policymakers may need to counteract “a premature easing in financial conditions,” the Goldman team wrote.

(Updates to note rationale, starting in first paragraph.)

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