GOLDMAN: December

Back to the future clock time
Goldman turns back the clock on a Fed rate hike. IMDB / Universal Studios

Goldman Sachs now believes the Federal Reserve will raise interest rates in December.

In a note Wednesday, the firm pushed back its forecast for the first hike in eight years from September to December following the Federal Reserve’s monetary policy update and press conference.

In its statement, the Fed maintained its outlook for inflation, cut its forecast for GDP growth, and raised its unemployment expectations for the year.

The FOMC’s updated “dot plot,” showing their preferred trajectory of interest rates, indicated that fewer members are anticipating a rate hike this year, though the median dots still indicate 2 interest rate increases this year.

Taking all this into account, however, Goldman’s Jan Hatzius wrote that the Fed chair Janet Yellen has shifted the FOMC’s “center of gravity,” writing:

We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition
for the FOMC to actually hike in September, but the committee did not lay that groundwork [on Wednesday]. Our new call moves our forecast for what the FOMC will do closer to our long­standing view of what the FOMC should do, in light of risk management considerations.

The Fed has emphasised all along that it is glued to incoming economic data, and will use these as the basis for its policy decision.

According to Goldman, the “data hurdle” appears to be too high for a hike in September.

Further abroad, Janet Yellen touched on the debt crisis in Greece in her press conference, noting that the US economy has “limited direct exposure” to any fallout. However, she said there could be a spillover effect that could affect their assessment of the economy.

With Greece’s debt unresolved, Goldman still sees some threat to the US economy.

Hatzius again:

A hike in September could again become our baseline if we were to see much stronger­ than­ expected activity or inflation data over the next few months, a sharp easing of financial conditions, or a combination of the two. But that said, we think a December liftoff date is both more likely and better policy than September.

Here’s a chart comparing the Fed’s current year-end forecasts for interest rates to where they were in March.

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