Yesterday morning Goldman Sachs dropped its forecast that the Fed would be hiking rates again in the United States after the next FOMC meeting in March.
Jan Hatzius, Goldman’s head of global economics, and his colleague Zach Pandl said in a note to clients the reason was that “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.”
Financial conditions can tighten for a number of reasons and in various degrees. But speaking in Sydney at Goldman Sachs Global Macro Conference for Australia and New Zealand yesterday, Hatzius told the audience that this tightening in financial conditions was the most acute since 2009.
He was saying that markets – particularly currency markets which have driven the US dollar higher and so drag on American competitiveness – have in large part done the Fed’s job for it.
A large tightening of this magnitude, and a reference to the US recession of 2009, naturally feeds concerns about the path of US economic growth.
But Hatzius had good news for the audience.
Hatzius told the audience that “lower energy prices boost consumption”, and the “inventory cycle should turn positive soon”, mitigating the tightening.
That means that the tightening in financial conditions was “already in the numbers” and the combination of factors is already in Goldman’s forecasts for growth in 2016. Hatzius expects growth to return to the post-GFC average of around 2.1% across the year.
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