Goldman: “We Have Become Less Confident About Near-Term Hikes”

While various Fed presidents continue to toe the party line, saying they expect 3 rate hikes in 2017, most recently the Fed’s Kaplan earlier this morning, the firm which not only sets Fed policy but now openly tells the president what to do, Goldman Sachs, is starting to get cold feet, and in a note released overnight, the firm’s chief economist Jan Hatzius says that “we have become a bit less confident about near-term hikes.” The U-turn was to be expected as it comes just days after Goldman threw in the towel on its long-dated strong Dollar call, which traditionally comes hand in hand with revisions to Fed rate guidance.
That said, despite the hinted caution of a possible upcoming cut to its rate hike forecast, Hatzius still maintains his existing call for two more hikes in 2017 and says that while “market pricing of future Fed rate hikes has declined in the wake of weaker GDP and inflation data, signals of an earlier Fed balance sheet runoff, and reduced optimism on fiscal easing” he notes that “markets may be underestimating three factors pointing toward continued steady hikes. First, despite a higher funds rate, our FCI has eased in recent months as global growth now looks more resilient than earlier in the cycle. Second, not only the growth-positive aspects of the Trump agenda but also the growth-negative aspects – especially the specter of protectionism – have receded in recent months. Third, labor market slack has now largely evaporated even when we measure it very broadly.”
That said, his point about financial conditions continuing to ease is notable. As Hatzius points out, “the sensitivity of financial conditions to a higher funds rate is far lower than at the time of the December 2015 hike, probably partly because the global economy looks much healthier than a year ago. The Fed hiked both in December 2016 and March 2017, yet financial conditions are at their easiest levels since August, as shown in Exhibit 1. This has pushed the FCI impulse from deeply negative in 2015 and early 2016 to significantly positive now. Our analysis suggests that the swing in the FCI impulse is a much more important driver of US growth than fiscal policy, at least for 2017.”

This post was published at Zero Hedge on Apr 20, 2017.