Dollar Slides After Goldman Capitulates, Pulls March Rate Hike Forecast

A decision to pause in March would also be consistent with the likelihood that tariff-related uncertainty will look particularly high around the end of the 90-day grace period on March 1.

Yet even while admitting it was wrong, Goldman refuses to go all the way, and Hatzius hedges by saying that "this is a close call because there are still good arguments for a March hike, including a continued positive fiscal impulse that should keep growth above trend in Q1 even with tighter financial conditions, as well as a funds rate that remains at the very bottom end of the committee’s range of neutral rate estimates even after a December hike."

Additionally, Hatzius admits that there will be one easy way to test if Goldman is right in just two weeks: the bank's forecast of no hike assumes that the median number of 2019 hikes in the December dot plot moves down from 3 to 2; So if the median instead stays at 3 hikes, "the probability of March would increase again" according to Goldman.

Finally, despite Goldman's capitulation on a March rate hike call, the bank still sneers at the market's current pricing for the funds rate, which discounts less than one full hike in all of 2019. Why? Because in Goldman's forecast, the economy continues to grow above trend for most of the year, the unemployment rate falls further below the Fed’s estimate of its longer-term level, wage and price inflation gradually move higher, and we see a return to quarterly hikes in June that last through the end of 2019.

And here, out of nowhere, Goldman mentions rate cuts: just in case it is proven absolutely dead wrong and the Fed decides to start easing next year:

By contrast, the likelihood of sizable rate cuts—which would probably coincide with a recession or at least a serious recession scare—remains quite low over the next year or two, in our view. Current growth momentum is good, the FCI tightening is material but far from devastating, and the two key historical recession drivers—financial imbalances and a serious overheating problem—are still not visible. We therefore think that the storm will pass and this will keep Fed officials on a normalization path, albeit a more tortuous one than up to now

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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.