Goldman Sachs have cut their Federal Reserve rate hike forecast for 2019 again

Author: Eamonn Sheridan | Category: Central Banks

As late as early December Goldman Sachs were predicting four Federal Open Market Committee (FOMC) interest rate rises in 2019

Only a few weeks ago they cut that projection to three. Economists at the bank have now cut the forecast even further, to just 1 for all of next year. (OK, they have cut it to 1.2 … but I rounded it to 1, don't get me started on 0.2 of a rate hike)

From the horses mouth:
  • a rate hike in Q1 quite unlikely
  • our estimates for the probability of hikes in subsequent quarters have also come down to 55% for Q2 (from 65%) and 45% in Q3 (from 55%)
  • we still view the probability of a hike in Q4 as 55%, i.e. slightly more likely than not
  • We have also slightly raised our probability of rate cuts to 10% in Q3 (from 5%)
  • these probabilities generate an expected value of 1.2 net hikes in 2019, compared with market pricing of zero hikes
GS citing equity market volatility and slowing economic data 
  • expect GDP of 2% in H1 of 2019 vs. expecting 2.4% in their previous forecast
  • expect GDP growth of 1.75% in H2 of 2019
More from the note (bolding mine, highlighting a risk to the GS call):
  • a slowdown is already evident in the numbers
  • the impulses from fiscal policy and financial conditions are turning more negative
  • Unemployment is already ¾pp below our 4½% estimate of the rate consistent with a 2% inflation rate in the medium term … other measures of labor market slack confirm the message of labor market tightness. Given the close correlation between labor market overheating and subsequent recession, Fed officials will want to see a significant slowdown in growth. This means that if financial conditions reverse too much of their recent tightening, Fed officials would likely turn more hawkish to keep growth from rebounding too much." 

GS on recession risk:
  • investors have become much more concerned about a possible recession in recent months, as financial conditions have tightened and growth has slowed
But Goldman says recession "risk remains relatively limited in the short term" 
  • the prospects for a soft landing are better than now widely thought

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