Goldman Capitulates: Revises Fed Call, No Longer Expects A March Rate Hike

Another day, another Goldman prediction fiasco, and no, we are not talking about the stop out of the firm’s Top Trade for 2016, namely the long USDJPY, short EURUSD (although that should happen any minute) – we are talking about that perpetual permabull, Jan Hatzius, just admitting the economy is in far worse shape than expected (if only by him), and as a result he just “revised” his Fed rate hike call, no longer expecting a March hike, instead now forecasting that the first rate hike will be in June and “and see a total of three rate increases this year.”

Of course, come December Hatzius, like the Fed, will be forced to admit that not only will there be no more rate hikes but everyone will be asking, if not begging for the Fed to cut.

From Goldman:

  • We are revising our Fed call, and now expect the FOMC to keep policy rates unchanged at the March 15-16 meeting. Incoming economic data continue to look broadly consistent with the committee’s outlook, but financial conditions have tightened meaningfully, and officials sound inclined to take more time to gather data and observe market developments. We therefore expect the next rate increase in June, and see a total of three rate increases this year.
  • Even after this change, our forecasts remain well-above market pricing, which now shows only about a 50% chance that the Fed raises rates at all this year, and a 25% chance that the committee lowers rates. The first full rate hike is not priced in until about August 2017.

We are revising our Fed call, and now expect the FOMC to keep policy rates unchanged at the March 15-16 meeting. Incoming economic data continue to look broadly consistent with the committee’s outlook at the time of the December meeting. However, financial conditions have tightened meaningfully, and recent public comments suggest Fed officials see greater risks to the outlook from these changes than we previously had thought. We now expect the next rate increase at the June FOMC meeting, and see a total of three rate hikes this year. Even relative to our revised baseline forecast, risks are tilted to the downside—it is still easier to see the committee slowing down the rate of increases then speeding them up.

 

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… developments in financial conditions have clearly not cooperated with our year-end outlook. Our Financial Conditions Index (FCI) has tightened by about 50 basis points (bp) since the December FOMC meeting, implying a hit to growth of about 40bp over a one-year period, if the tightening proves persistent (Exhibit 3). Before the last week, we were unsure about how policymakers would react to recent market volatility; officials may have expected some tightening in financial conditions after liftoff, and their threshold for responding was therefore unclear. However, recent comments suggest that policymakers see the tightening in financial conditions as excessive, with potential implications for growth and the path for policy later this year.

 

 

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… San Francisco Fed President Williams said in Q&A after remarks last week, “These developments in financial markets abroad, I think, have caused me to lower a small amount my forecast for GDP, and lower my forecast for core inflation.” He added that recent developments, “tell me we will probably have a little bit more monetary stabilization than I was thinking in early December.” Similarly, Dallas Fed President Kaplan said, “When you put all that together I think there is good reason to be patient (and) take more time to assess the impact on the U.S. economy.” When asked about the path for the funds rate in new projections at the March FOMC meeting, he said: “It’s not going to be any steeper.” Earlier today, New York Fed President Dudley said in an interview, “One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting.” And he said he interpreted the last FOMC statement as conveying that “things have happened in financial markets and in the flow of the economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward” (Source: Market News via Bloomberg). Lastly, Governor Brainard told the Wall Street Journal, “Recent developments reinforce the case for watchful waiting.”

 

Fed officials are thus understandably uncertain about current market conditions, and inclined to be patient in order to gather more data and observe market developments—not unlike the committee’s reaction to market volatility in August and September 2015. Although there are six weeks to go before the March FOMC meeting, we expect that the committee will not have enough information in hand to determine that the tightening in financial conditions “left little permanent imprint on the economy”—as Vice Chair Fischer said this week about market turbulence last year. A second rate hike in June looks more realistic; action at the April 26-27 meeting could be an outside possibility if market conditions improve significantly. Even after this change, our forecasts remain well-above market pricing, which now shows roughly a 50% chance that the Fed raises rates at all this year, and a 25% chance that the committee lowers rates. The first full rate hike is not priced in until about August 2017.

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In other words, the crack Goldman economists are now only 3 weeks behind the Fed Fund futures.


via Zero Hedge http://ift.tt/1o7iHlP Tyler Durden

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