Goldman Sachs has issued a dovish call on Federal Reserve policy, with chief economist Jan Hatzius arguing that a rate increase at the central bank's September 15-16 meeting is very unlikely given the recent trajectory of economic data, according to Bloomberg. Hatzius published his analysis in a note on Sunday, contending that market expectations for further interest rate hikes remain too aggressive in light of recent inflation developments and broader economic trends. The Goldman chief economist's argument is anchored in a consistent pattern of underwhelming economic releases rather than a single data point.
Retail sales, payroll growth, and inflation readings have all disappointed expectations, leading Hatzius to conclude that the Federal Open Market Committee's dovish members have no reason to shift their stance toward supporting a rate increase. Hatzius noted that after two months of materially softer jobs and inflation data, it is difficult to envision any committee doves shifting toward supporting a hike. Goldman's baseline forecasts point to further improvement in inflation rather than a renewed deterioration as the year progresses.
The bank has reiterated its view that market pricing for the federal funds rate remains too hawkish, suggesting traders are still overestimating the likelihood of future rate increases. Market pricing has already begun shifting in the direction Goldman outlined. CME FedWatch data shows the probability of a 25 basis point increase to the 3.75%-4% target range has fallen to around 30% heading into the September meeting, down notably following softer than expected July inflation data that shifted market sentiment last week.
Traders have pushed back their expectation for the next 25 basis point hike to January, representing a significant retreat from the prior week when a December move had been fully priced in. Goldman also highlighted an expected steepening in the US Treasury yield curve, attributing the move to a combination of cooling price pressures, diminishing rate hike expectations, and growing concern over the US fiscal outlook. The bank identified this as the more actionable signal for rates desks.
Two-year Treasury yields, among the most sensitive instruments to shifts in Federal Reserve policy, remain above 4%, suggesting the market has yet to fully incorporate Goldman's more dovish rate view into shorter-dated instruments. Analysts note that a note carrying this much conviction from Goldman's chief economist typically moves positioning at the margin, particularly with FOMC minutes and further economic data expected before the September meeting.
Source: investinglive.com