"Blunt Language" - Goldman Explains Why It Is So Confident The Fed Will Hike In Under 3 Weeks

Tyler Durden's picture

After Friday's payrolls miss, the market's initial reaction was to aggressively fade the probability of a near-term Fed rate hike, as September odds initially tumbled, only to quickly rebound into the afternoon. What catalyzed this jump? As we reported at the time, the move was almost entirely driven by an unexpected note by Goldman's Jan Hatzius who bucked the trend set by other sellside lemmings, and instead of punting the September hiking date to December, the Goldman strategist said that the weak jobs report was nonetheless "strong enough" to prompt him to boost his Sept. rate hike odds from 40% to 55%.

Realizing the severity of his prediction, and the collapse in credibility he would suffer is he is - again - wrong (as we have duly documented, the past two years have been absolutely abysmal for Goldman predictions and recommendations), earlier today Goldman took time away from his holiday schedule and penned a note to explain why he is confident that, contrary to every other forecaster, he expects a better than even chance of a rate hike to be announced in just over two weeks when the Fed meets on September 20-21.

As he puts it, Yellen’s Jackson Hole speech used "blunt language" for a Fed chair, "which would have been unnecessary if she was only trying to convey a general sense that rates would be moving higher over time, or to signal a potential hike that was still 3½ months away. There are plenty of other opportunities to prepare markets for a move before the December meeting."

Just as important was Goldman's take on the the consensus call that the Fed would not hike until the election. As Goldman rhetorically puts it, "wouldn’t the tactics favor waiting until December given the presidential election?" To which it responds: "This is a widespread view, but we have not found much evidence that the election calendar has an impact on monetary policy—the Greenspan Fed started to tighten in June 2004 and continued to move right through the election, and the Bernanke Fed announced the then-controversial QE3 in September 2012, not December."

So just maybe, Yellen (and Goldman) may have it in for Hillary. The rest of Hatzius' contrarian reasoning is laid out in the following rhetorical Q&A dubbed "Why September?"

For the sake of what little is left of his credibility, we hope he is correct this time.

From Goldman Sachs:

Today we depart from our usual US Views format and discuss the outlook for Fed policy in Q&A format.

Q: You moved up your probability of a hike at the September meeting to 55% on Friday despite a below-consensus payroll number. Why?

A: Largely because the speech by Chair Yellen at Jackson Hole suggested a relatively low bar for this report. She said that “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months”. The condition was that the data must “continue to confirm” the committee’s outlook—not a very stringent test, in our view, because it signals a predisposition to think that the outlook is on track.

Q: What makes you think Chair Yellen meant a hike in September, not December?

A: Two things. First, nothing happens without a good reason in these speeches, especially as far as monetary policy signals are concerned. The phrasing “case…has strengthened” was blunt language for a Fed Chair, which would have been unnecessary if she was only trying to convey a general sense that rates would be moving higher over time, or to signal a potential hike that was still 3½ months away. There are plenty of other opportunities to prepare markets for a move before the December meeting.

Second, when Vice Chairman Fischer was asked by Steve Liesman on CNBC later that day whether the “strengthened” comment meant that we should be “on the edge of our seats for a rate hike next month” (i.e. in September), he answered “what the Chair said today was consistent with answering yes”. This wording sounded like a deliberate signal that both of them, not just Fischer personally, think September is on the table for a hike.

Q: Did this shift come out of the blue?

A: The strength of the message surprised us, but we don’t think it came out of the blue. Back in the spring, the committee was ready to go in June or July, but then the weak May payroll report and the Brexit vote interfered. Now both of these worries have dissipated, the labor market has made further headway, financial conditions are easier than they were three months ago, and no major new risks have appeared. If they thought a hike made sense then, it should make more sense now. In this context, it is also noteworthy that the number of regional Federal Reserve Bank boards asking for discount rate increases—a barometer of policy sentiment within the system—has risen further in recent months and now stands at 8 (the highest since December).

Q: Did Friday’s payroll data clear the bar?

A: It is a closer call than we’d like, but on balance we think so. First, even the 151k August number in isolation is well above the “breakeven” pace—the number that Fed officials believe is consistent with unchanged labor market slack in the medium term—of less than 100k per month. Second, the longer-term trend measures such as the 3-month average (232k), 6-month average (175k), or 2016 year-to-date average (182k) are all higher. And third, preliminary August payroll numbers have had a tendency to surprise on the downside initially but ultimately to be revised higher, by an average of 71k since 2011; Fed officials are undoubtedly aware of this.

Q: What about other indicators?

A: They have been mixed to slightly weaker. On the labor market, the August household survey was a bit soft, with a flat 4.9% unemployment rate, but jobless claims remain low and household labor market assessments have improved further. On growth, the manufacturing surveys for August weakened, but GDP tracking estimates for the third quarter have been moving higher—our own estimate is 2.9% now, the NY Fed is at 2.8%, and the Atlanta Fed at 3.5%. On inflation, the latest core PCE number was only 0.1% but the year-on-year rate still stands at 1.6%. And on wages, Friday’s average hourly earnings number was only 0.1% month-to-month, but we think it was held back by calendar effects (our forecast was 0.0% for that reason); moreover, our broader wage tracker stands at 2.6% and still signals gradual acceleration. Overall, we think these numbers are probably sufficient to “continue to confirm” the committee’s outlook, alongside the more important payroll numbers.

Q: Many market participants believe that the talk about September was only an attempt to “create optionality” in case the data were very strong and the committee felt it had no choice but to hike. Do you agree with that?

A: Not really, because it overstates the FOMC’s sensitivity to one single month of data, or maybe even one release. It is very rare for one strong payroll number to turn the committee from wanting to stay on hold to feeling they have to tighten now. (There is an asymmetry here, as one very bad payroll report in early June was largely to blame for the committee’s change of heart about a June/July hike even before the Brexit vote.)

Q: Wouldn’t the tactics favor waiting until December given the presidential election?

A: This is a widespread view, but we have not found much evidence that the election calendar has an impact on monetary policy—the Greenspan Fed started to tighten in June 2004 and continued to move right through the election, and the Bernanke Fed announced the then-controversial QE3 in September 2012, not December.

Q: How much does it matter if they go in September or in December?

A: In the grand scheme of things, not much. But September does have some tactical advantages if they think a move sometime this year is very likely. It would avoid the need to first go through yet another press conference meeting with no hike, yet another reduction in the projected funds rate path—at a minimum to a one-hike baseline for 2016—and yet another labored explanation why holding off now does not mean that the plan for higher rates has been abandoned. Many market participants believe that the FOMC likes to talk about hiking soon but ultimately always flinches. A hike in September would undermine this narrative.

Q: If they do go, how much would financial conditions tighten?

A: This is of course uncertain. As a starting point, our research has shown that a funds rate hike on average tightens financial conditions by about 20bp. The variation around this is obviously large, and there is some (weak) evidence that the effects are bigger in an environment of greater global monetary policy divergence. But we would keep two things in mind. First, our FCI is now almost 50bp easier than on May 18, the day the hawkish April FOMC minutes were published. So there is some room for FCI tightening before it looks worrisome. Second, we think the committee would combine the hike with a reduction in the projected path for the funds rate to a one-hike baseline for 2016, i.e. a message that the Fed is done for the year, as well as a downgrade in the assessment of the stance of monetary policy from “accommodative” to “moderately accommodative” or the like. We think this could help keep the FCI impact moderate.

Q: Why do you think the market is only pricing a 30% probability of a hike?

A: Part of the reason is that the recent data have been a bit softer. But the more important factor may be that markets have short memories, and fading the Fed’s willingness to tighten has been a winning trade all year. That is our best explanation for why the initial response to Chair Yellen’s Jackson Hole speech, in particular, was so small. The market only moved significantly after the Fischer interview, and even that move was largely reversed in the following days, on little new information.

Q: Would the committee move in September if market pricing stays where it is?

A: Probably not. Historically, 90% of all hikes have been at least 70% priced on the eve of the meeting. We don’t think this is a hard and fast threshold, but suspect that the committee would want the probability to be materially higher than the current 30%. So we would probably need to see some hawkish Fedspeak between now and the start of the blackout period on September 13 to keep the chance of a hike alive. A signal that the August employment report showed sufficient employment growth to confirm the committee’s baseline outlook might be enough to shift market expectations toward a hike at the September meeting.

In terms of opportunities for providing such a signal, there is not very much on the calendar at the moment—speeches by Presidents Williams (September 6) and Rosengren (September 9) as well as Congressional testimony by Presidents George and Lacker (September 7). However, unscheduled press interviews are always possible.

Q: How confident are you that we will see that?

A: Not very confident, or else our probability would be higher than 55%. That said, we are much more confident (80%) that there will be a hike before the end of the year.

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Boris Alatovkrap's picture

Four simple word… "Fed will not raise rate"

Billy Shears's picture

Boris, your awesome but that's five words!


db51's picture

He said 4 simple words.   The word FED is not a simple word....therefore...Boris is correct.  Besides, it's you're   not your.   Boris have better command of English language than you.  lmao

Aussiekiwi's picture

Boris is always right.....there, four simple words

bleu's picture

As if the Fed has not destroyed America enough. https://goo.gl/IoiSjv

Pinto Currency's picture

The Fed is being swept along by a bond market that is about to break down (higher yields) and commodites that are breaking higher.

See interview here:


or here:


German, US and Japanese bonds are forcing the Fed's hand - a D11 rolling toward Yellin and Stan Fischer.

Manthong's picture

The Fed will hike before the election, the Cubs will win next year’s World Series, Hillary will tell the truth about something, Bill will confess to rape and monkeys will come flying out of my butt.

Pinto Currency's picture

Think of it as the bond and commodity markets calling the Fed's hand after decades of increasingly reckless Fed policy.

manofthenorth's picture

I would bet the FED goes NIRP before raising.

philipat's picture

Come on Mr Fellen, don't be a wimp. If everything is so awesome (Or if your shareholder Banks really need a raise in interest rates) make it a 100 Bps hike not a pathetic 25 bps. Go for it Mr Fellen, we can't wait...

espirit's picture

This is so sad.

Fed jawboning, Goldman prognostication, Cushing build then not, supply chain interruption, etc.


All in the effort to generate churn from a market that flatlined long ago, and keeps getting shocked to appear to keep moving for the spectators benefit.

The Saint's picture
The Saint (not verified) Manthong Sep 4, 2016 11:34 PM

"....monkeys will come flying out of my butt."


That's going to hurt.  What if you're right?

Boris Alatovkrap's picture

Monkey is hurt less than is skittle color unicorn.

The Real Tony's picture

Commodities are topping out and the next move in interest rates is downward. I'm shorting Teck Corporation at the end of this month looking for about a 75 percent return in 4 or 5 months time.

nmewn's picture

The simple fact they are (metaphorically) pulling their entrails out through their nostrils on live TeeeVeee over a paltry POINT TWO FIVE PERCENT INCREASE (expressed numerically as .25%) says they won't.

.25% is a lot of bananas when the ledger says you already owe twenty trillion with zero plans to pay it back.

Bonds...bonds for the poor ;-) 

RiverRoad's picture

Word has it it will be a .000000000000000000038% increase.

nmewn's picture


The Keynesian socio-economic death spiral is upon them, I'm just glad I lived long enough to see it.

From the beginning of money being used in the exchange of good & services we have warned the people of their attempts at deception & the devices used to accomplish it, from simple coin shaving in the royal houses of "the king" despoiling the labor of his "subjects" to ...now...the decrepit old Gawd of Inflation that will rise no more, slain in the royal chambers by his bastard son Deflation...lol.

Currency debasement my friend, never take your eye off the golden commodity ball, with the rise in the dollar amount to purchase zinc, pennies sheathed in copper are now worth a penny...again...to the king, next up, plastic "currency notes" sold to the public as a "kingly cost savings measure".

Funny how that works ;-)

RiverRoad's picture

Now where in the heck did I put those Green Stamp/Blue Stamp books?

UnschooledAustrianEconomist's picture

Taken current situation, that's already a pretty high risk.

auricle's picture

Classic Goldman...talk a rate hike while taking the opposite side, then collect from the muppets when no rate hike. 


RiverRoad's picture

Classic Goldman/Fed:  Talk a perpetual rate hike narrative to keep the masses from abandoning the stock market and buying bonds hand over fist.....  We wouldn't want that to happen now would we?

DavidC's picture

If rates are at 0.25% and raised by 0.25% that's a DOUBLING, a 100% increase.

If rates are at 5% and raised by 0.25% that's a TWENTIETH, a 5% increase.


Raffie's picture

2 words - Fed will not hike because they full of crap and are stirring the markets to make cash without really raising the rates and hurting the PM.

Fisherman Blue's picture

Goldman is clearly on the other side of the trade they are jaw boning.

True Blue's picture

Aren't they always?

It's cute; they think people actually believe them at this point.

I passed through yahoo recently and my eye was caught by some article proclaiming the economic brilliance emanating from Jackson's stinking Hole, the joys of NIRP wonderland, and how happy we'd be once we were properly drenched in lemonade unicorn piss and standing knee deep in skittleshit -just like Japan and the Netherlands.

I couldn't bring myself to read more than the headline blurb, but figured if even they are chanting the om mani padmi hum of NIRP Nirvana -it is coming to a wallet near you sooner or later; now with Goldman saying this... I'm betting on way sooner. Who was it recently said that the FED wasn't going to raise rates before the election because it would hurt Hillary? Then, to that way of thinking, the corollary must be true: that lowering rates further would somehow boost her campaign against the American people -sorry- her campaign for President.

All I know for sure is that I need another stack after this weekend's trip to the lake...

sonya55's picture

Thank you, sometimes it much better to not read the acticle and go straight to the comments.

Boris Alatovkrap's picture

Boris is too sometime struggle with so many word in article and after read headline, is quick go to comment section. Okay, sometimes is look at picture, but usually is rely on intelligent and sometime humorous commentary from ZH tovarisch.

Billy Shears's picture

A company that steals taxpayer money and ruins its own clients has no shame. Why believe anything Goldman has to say?

Escrava Isaura's picture

Because they might be right.

There’s no hiking before election. It makes no sense.

Power, Fed being one of them, are not so worried about Trump. They’re worried what will come after Trump.

Power has to figure out a way to keep the price of staples —to the general population— low, so hikes are coming, most likely, soon after election.


jeff montanye's picture

but sometimes they are right, especially after being wrong for long.  remember their short gold call in early april '13?  wished i'd bought put options on nugt or similar.  or maybe just sold my portfolio and bought it back a week later.

could be they think hillary is toast and they might as well hand the dreaded reset to trump.

also the fed prolonged the '30's depression by raising rates in the late '30's and the fed values historical precedent.

old naughty's picture

Could it be that GS

swung around realising that:

this is not a "normal" (whatever that means) election?

And the master (to Fed, Trump, Hitlery, Obummer, UN, IMF, G20...) follows an

very old agenda, wouldn't give a fxxk if it's election year, or not.


Hint: Obummer seemed to be timing-wrong on just about anything...

is he really?

Hint: "Biden" (Planet X nickname) secret will be "whatever" !?

Hulk's picture

Read my lips: "No Fed rate increases"

JenkinsLane's picture

In a sense, Goldman has actually become the Fed, in that no one really believes what either of them say publicly.

blindman's picture

i tell you they are full of shit.
everything they know is wrong.
would you pay me for that information?

The Duke of New York A No.1's picture

GS is full of shit alright ... but it's not becuase they are wrong ... GS knows whats going on; GS perpetuates a constant lie factory to shear as many sheep as possible.






blindman's picture

like i said, full of shit. no integrity if that means anything?

Thebighouse's picture

She would never hike rates and have to give up sex with MicKy Ob.

Maybe three ways with Biden....ah he just holds up score cards...like a diving judge.





Thebighouse's picture

What is Kordura going to say?


Thebighouse's picture

I would rather place a trade on the correct side!

Nothing new...yen rises...like viagra....who would really want to own that piece of crap.

Big bank purchases of the rest of the stock market...yen falls..then rises...the bank owns it all!!!!!

Ipsofacto hokus pokus wowie zowie....we have stolen the country!

LMSAO...laugh my silly...etc

Lost in translation's picture

Hang Yellen! Use piano wire!

Aussiekiwi's picture

'the Greenspan Fed started to tighten in June 2004 and continued to move right through the election, and the Bernanke Fed announced the then-controversial QE3 in September 2012, not December."

June 2004 happens to have been before the crash of 08 and the economy looked incredibly strong as opposed to the weak state it is in now, raising under those circumstances as part of an existing expected pattern is very different to raising rates now. QE3 was not tightening it was a loosening of monetary policy.

Due North's picture

Is it just me or does this snapshot of Yellen make one think of the short, stubby Muppet of the pair of tuxedo wearing gentlemen that sat in the balcony box on The Muppet Show?


TheVillageIdiot's picture

the Fed will cease to exist in 3 days, so what does it matter? 

Zer0head's picture

Q: Wouldn’t the tactics favor waiting until December given the presidential election?

June 2004 bad news rate increases  as Bush41 loses to SlickWilly

Sept 2012 good news QE3 in advance of Barry's 2nd victory

No Jan, politics doesn't play into this at all


tarabel's picture



There is only one thing which might compel a Fed rate hike-- elevating Trump electoral strength.

As the Crone of Chappaqua continues to fade, it may become necessary to bind together Trump's rising political prospects with a sudden reversal (read: crash) in the stock market. December would be too late. A swift and unmistakeable correlation may be called for, regardless of any future trouble this may bring.

blindman's picture
tarabel's picture



By dumping the markets at a time when Trump appears to be rising, it becomes possible to (falsely) correlate the two events.

Even if the true association is between the prospects of Future Convict 6794567 and the inescapable fade of the Obama Economy.

blindman's picture

there one imaginative stretch.
Graham Parker - 'Hey Lord Don't Ask Me Questions'