Goldman Sachs chief economist Jan Hatzius has become distinctly less confident in his expectation that the Federal Reserve will raise interest rates twice more this year and make a major announcement about reducing its bond holdings.
Hatzius’ scepticism is due to US inflation, which has been undershooting the Fed’s 2% official target for most of this economic recovery, and continues to lag despite constant warnings to the contrary.
“The risk to our near-term funds rate view is now slightly greater, largely because the range of plausible outcomes has widened,” Hatzius and other Goldman economists wrote in a research note.
“We have shaved our subjective odds of a June rate hike to 80%, from 90% earlier, and have also become a bit less confident in a September hike,” Hatzius added. “If the outlook deteriorates significantly, the committee might simply delay any further tightening steps. And even a more modest deterioration could prompt the committee to pull forward the announcement of balance sheet runoff to the September meeting and delay the third 2017 rate hike until December.”
That’s quite a few ifs.
Low inflation is generally a good thing, but when it’s persistently low, it can signal an economy running below its potential. In the United States, it has also tended to reflect long-run wage stagnation for middle-income families.
Goldman’s comments follow a similar note of caution from PIMCO.
“The noticeable softening in inflation increases the pressure on Federal Reserve policymakers to explain their presumed plan to hike interest rates in June,” according to Tiffany Wilding, senior Vice President and US economist at the bond fund. “While still-easy financial conditions and a 4.4% unemployment rate could help the Fed craft a coherent story for June, continued weak inflation could complicate further hikes later this year.”
Changes in the path of monetary policy because of disappointing economic conditions have certainly happened before. The Fed kicked off 2016 promising four interest rate hikes. It barely got a single one off, at its last meeting in December.