Goldman's Huge Call: Don't Be Fooled, There Won't Be Any Real Tightening This Year

paulson bernanke whisper

Goldman Sachs has already put forth a rather bold counter-consensus forecast for U.S. interest rates — no fed interest rate hike until the end of 2011.

Yet an extension of this long-delay before any tightening on the interest rate front is that Goldman Sachs doesn’t even expect major tightening via the federal reserves liquidity facilities which were created during the crisis to un-crunch credit markets:


The New York Fed has already run some tests of its reverse repo tool on a very small scale. We expect further tests in coming months for both this and the term deposit facility. In testimony on the Fed’s “exit” strategy in February, Chairman Bernanke said that “[a]s the time for the removal of policy accommodation draws near, these operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates.” Although the Chairman was not very specific about the lead time between reserve drains and rate hikes, we interpret his comments to mean a small number of months—no more than six, and probably fewer than three.

If this interpretation is correct and rate hikes are as far off as we think they are—i.e., not before the end of 2011—then large-scale reserve drains are unlikely for at least another year. This is in contrast to the views expressed by many market participants, who expect such operations during the second half of 2010.

So the message from Goldman seems to be: Don’t expect any significant form of tightening in 2010.

(Via Goldman Sachs, U.S. Economics Analyst, 19 March 2010)

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