I posted the headlines earlier: Goldman Sachs has moved its forecast for the first Federal Reserve increase to Q3 2015 (from Q1 2016 )

The main points from GS:

  • Despite the striking weakness in the Q1 GDP report, we remain quite confident that the US economy is accelerating to an above-trend pace
  • Our current activity indicator (CAI) is running at a healthy 3.5%
  • The rapid growth in the CAI in June is particularly encouraging because the distortions from the cold winter should by now have mostly run their course
  • The acceleration is most visible in the labor market – unemployment rate has continued to fall more rapidly than expected… the decline is now entirely due to faster job growth as opposed to lower labor force participation (unchanged since December)
  • Fed officials are getting closer to the employment side of their mandate
  • Inflation numbers have also surprised on the upside over the past few months
  • Financial conditions have eased further: Treasury yields remain low, credit spreads remain tight, and equities continue to make new highs
  • For the first time since the crisis, our GS Financial Conditions Index (GSFCI) now stands near the “appropriate” level … the transmission of the Fed’s accommodative monetary policy stance to the financial variables that actually matter for real economic activity has also made a significant amount of progress
  • In response … we are pulling forward our forecast for the first hike in the federal funds rate from 2016Q1 to 2015Q3 … we expect the funds rate to rise gradually back to 4% by 2018
  • Our revised forecast is fairly close to current market expectations, the shift in view is nevertheless important because it marks the first time since the crisis that we have moved up our funds rate forecast

We still expect another year of near-zero rates despite healthy growth in output and employment

  • Job market utilization remain well below normal – U6 remains at 12.1%, which we estimate is 2 percentage points above the cyclical norm
  • We still expect inflation to normalize only gradually, despite the higher recent numbers … wage growth remains at just 2% … is a reason to doubt the staying power of the recent inflation pickup
  • We still believe that the risks of tightening policy too early at the zero lower bound outweigh those of tightening policy too late because going too early risks a painful reversal and potentially a need to return to QE and other unconventional tools.

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Some chatter in the markets around this note, and its been a factor in the USD strength we have seen this morning and it may well stretch into the European and UK markets.