GOLDMAN: Developments that the Fed considers ‘have been worse than almost anyone expected’

The Federal Reserve meets on Wednesday and Thursday to decide if it will end the era of 0% interest rates, which it introduced in December 2008in its effort to stimulategrowthand inflation in the wake of the global financial crisis.

“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy,” Yellen said to Congress in July.

There’s a decent crowd of economists who believe that the Fed will hike rates on Thursday, which would be the first hike since June 2006.

However, the economists at Goldman Sachs are part of the majority who see the Fed waiting.

“Even if we focus only on the economic data, it is hard to argue that developments have beaten expectations on net,” Goldman’s Jan Hatzius and Zach Pandl write. “Although the growth data have been quite good and the labour market has improved further, both wage and price inflation have fallen short of expectations. Once we broaden the perspective to include financial conditions, developments have been worse than almost anyone expected.”

In addition to its dual mandate of facilitating maximum employment and price stability, the Fed has an unspoken third mandate to promote stability in the financial market, which is what Goldman highlights in it chart of its proprietary financial conditions index (GSFCI). The GSFCI is a weighted average of variables including the 10-year Treasury yield, the TED spread, the spread between BBB rated bonds and the 10-year note, average earnings per share, and a trade-weighted dollar index. Tighter financial conditions reflect increased difficulty in obtaining financing in the financial markets.

These metrics have trended unfavorably with the dollar already strengthening months and volatiliy slamming the global markets in recent weeks.

Gs financial conditions index

“I pledge to do my utmost to keep that trust and meet the great responsibilities that Congress has entrusted to the Federal Reserve — to promote maximum employment, stable prices, and a strong and stable financial system,” Chair Janet Yellen said when she accepted President Obama’s nomination to run the show at the Fed.

Ever since June, Goldman has been predicting that the Fed would make its first move in December.

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