Goldman's Take On The FOMC: Taper In September, Next Rate Hike In December

Tyler Durden's picture

When in doubt about the Fed's policies, or their implementation, always go right to the source of Fed ideas, Goldman Sachs, which moments ago published its post-mortem on today's FOMC statement, noting that the "post-meeting statement included modest upgrades to its description of growth but acknowledged the moderation in job growth and the decline in inflation, and it continued to describe risks to the outlook as “roughly balanced.”

The statement noted that the Committee expects to begin the process of balance sheet normalization this year, and an updated set of normalization principles clarified the series of caps. Taken together, Goldman continues to expect the announcement of balance sheet normalization in September and a return to rate hikes in December.

Main points from the report:

  1. The FOMC raised the funds rate target range to 1-1.25%, as widely expected. The median dot in the Summary of Economic Projections continued to show three hikes in both 2017 and 2018. The post-meeting statement included modest upgrades to its description of growth, continued to note the decline in the unemployment rate, but acknowledged the moderation in job growth and the decline in inflation. However, the statement continued to note that core inflation is running only “somewhat” below 2%, a more hawkish reference than we had expected. The statement continued to describe risks to the outlook as “roughly balanced.” Minneapolis Fed President Neel Kashkari dissented against the hike, in line with our expectations.
  2. The statement noted that the committee expects to begin the process of balance sheet normalization “this year.” The addenda to the statement provided additional guidance on the potential size of the “caps” for treasuries and mortgage backed securities, which could rise from initial levels of $6bn and $4bn, respectively, to peak caps of $30bn and $20bn. We think the language adopted – which dropped the condition “until the normalization of the level of the federal funds rate is well under way” included in the May minutes and the inclusion of specific dollar figures – make the start of balance sheet runoff in September more likely.
  3. The changes to the Summary of Economic Projections were a touch more hawkish than our expectations following the soft May CPI report. GDP growth in 2017 was upgraded a tenth to 2.2%, and the path for the unemployment rate was lowered significantly to 4.3% this year and 4.2% in 2018-2019, and NAIRU came down a tenth to 4.6%. Core PCE inflation for this year was lowered to 1.7% but was unchanged at 2.0% for next year. The funds rate projections were relatively stable, but the median and mode for 2019 declined by 0.1pp and 0.2pp respectively. Taken together, we continue to expect the announcement of balance sheet normalization in September and a return to rate hikes in December.

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order66's picture

4. If the SPX is below 2300 in September, we would then expect QE4.

MFL5591's picture

The Federal Reserve is a Jewish Mafia that must be dismantled! 

101 years and counting's picture

dont worry.  they'll crush stocks, the economy and all jobs when its convenient for their owners....

Zepper's picture

How are the markets going to absorb all these incoming junk bonds? Who is going to be purchasing them?

thesonandheir's picture

The primary dealers will be forced to purchase them.

Seasmoke's picture

Look what they were able to do to Gold on an action everyone knew 100% was coming. Over 20 points down in 1 1/2 hours.

Al Huxley's picture

I wish they'd start releasing these notes before the Fed announcement.  Maybe they could release the Fed notes AND their analysis the day before, at least before they give them to the Fed.

Drimble Wedge's picture

Must be nice to tell what the FED to do, then go make predictions about it.

 

Kinda makes you feel like Arnold Rothstein.

Al Huxley's picture

Well, one thing, is it REALLY improves the accuracy of your forecasts.

Downtoolong's picture

 

“Taper in September, next rate hike In December” 

 

Meanwhile, the ten-year rate drops 15 basis points in two days, all by itself.

 

What makes these people at Goldman, or the Fed for that matter, think they or their opinions or their actions really matter?