Goldman Sachs on the Federal Reserve
What's really changed in the past two months?
In early October markets were cheerful and the Fed was hammering home the idea of continued gradual rate hikes.
Suddenly, everything has changed except economic data.
Goldman Sachs notes today that data has only softened modestly from two months ago.
"Relative to the turmoil in the financial markets, the economic numbers have been remarkably stable recently," they write today, underscoring jobs and inflation numbers.
However a "much more significant change" is in financial conditions which have risen about 80 basis points in the Goldman Sachs measure since early October. If sustained, that could trim GDP by 0.75-1.00 percentage points next year.
"The [financial conditions] tightening may lead to fewer rate hikes than seemed likely earlier," they write. "We think they do-and should-respond to the economic implications of material and sustained changes in financial conditions by adjusting the funds rate path."
Goldman forecast three more hikes next year down from four but economists there are slowly setting the stage for a climb-down.
Today they say the chance of a March hike is now slightly below 50%.
For signals, they say to watch the dot plot later this month.
"Our forecast of no hike assumes that the median number of 2019 hikes in the December dot plot moves down from 3 to 2," they write.