It’s one thing when Nouriel Roubini says there’s a high chance of a double-dip recession, since such bearishness is to be expected from him. Yet now Goldman says there’s a 25% chance of a double-dip recession:
Goldman’s Jan Hatzius, via Alphaville:
…we strongly disagree with the notion that the recent slowdown in activity is a temporary “soft patch” in an otherwise fairly decent recovery, which seems to underlie the Fed’s forecast of a reacceleration in 2011 after a modestly slower period in 2010H2. On the contrary, we believe that the stronger growth of late 2009/early 2010 was a temporary “firm patch” in an otherwise extremely anemic recovery, and there is a sizable (25%-30%) risk of a renewed recession.
This means we should expect another $1 trillion of quantitative easing from the Federal Reserve, as a pre-emptive action to prevent a double-dip from happening according to Goldman.
Thus we could see even more purchases of U.S. treasuries ahead, as if yields haven’t fallen low enough already. Problem is, he Federal Reserve is likely more divided on quantitative easing than before, thus the run-up could be volatile:
In the runup to QE2, communications will remain a challenge for the Fed. The problem is twofold. First, the FOMC is far from united, and participants (especially regional bank presidents) who are sceptical of the need for further action will continue to make their views known. This causes confusion in the markets, even if it ultimately has little bearing on the outcome. Second, the leadership wants to signal that more easing is on the table without talking too pessimistically, for fear of “scaring” those market participants who believe that the Fed has a privileged perspective on the fundamental outlook for the economy. The results are sometimes a bit odd—for example, the statement in the August 10 minutes that “…no member saw an appreciable risk of deflation…” which came just a few weeks after one member (President Bullard) had presented an analysis that strongly implied just such a risk. Given the range of different opinions and the conflicting objectives, the risk of further communication hiccups and resulting bouts of bond market volatility is high.