Dollar Slides After Goldman Capitulates, Pulls March Rate Hike Forecast

However, while Hatizus refuses to admit a slowdown in either jobs or inflation, he notes that a "much more significant change is the sharp tightening in financial conditions." As Hatzius adds, "for a variety of reasons—including an initial bout of concern about Chairman Powell’s “long way from neutral” remark, the inevitable slowing of GDP and profit growth from their exceptionally strong pace, and the broadening tension between the US and China—rising investor anxiety has pushed up our FCI by about 80bp since early October. If the FCI remains constant at its current level, we estimate that tighter financial conditions would take ¾-1pp off real GDP growth over the next year."

It is this tightening in financial conditions that Goldman finally admits "may lead to fewer rate hikes than seemed likely earlier" for one simple reason: "if the financial markets have already delivered greater restraint, the committee just doesn’t have as much work to do in pushing up the funds rate."

Fed officials tend to downplay this link in their public communication because they dislike the “Fed put” narrative, i.e. the simplistic idea that they let the stock market dictate monetary policy. Nevertheless, we think they do—and should—respond to the economic implications of material and sustained changes in financial conditions by adjusting the funds rate path.

In other words, while the Fed downplays the "Fed put" narrative - according to Goldman - that's all that really matters in the end. Thanks for clarifying... even though we are confident that JPM's Marko Kolanovic will promptly brand this latest admission from Goldman as, drumroll, even more "fake and bad news."

So what are the practical implications for Goldman's funds rate call?

As Hatzius explains, despite the FCI tightening, recent Fed communications suggest that a hike in December is still very likely (in our view 90%). However, according to the Goldman chief economist, "the probability of a move in March has now fallen to slightly below 50%."

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Gary Anderson 1 year ago Contributor's comment

Well, maybe the ECB can avoid tariff wars and keep zero growth humming. Lol. But I doubt it.