The cozy "relationship" between Goldman and the Fed has been documented on these pages and elsewhere for years. From our 2010 question "Why Does Brian Sack Interact With Goldman's FX Committee [12]?", to the Carmen Segarra tapes [13], the fact that the Fed, and specifically the New York Fed, is merely a branch of Goldman has been firmly established. Of course, for a bank which has every other major global financial institution [14]also firmly in its grasp, this is merely ordinary course of business.
The main reason why this two-way relationship is so very critical, is because in a Fed dominated by career economists who are clueless about practical policies, the entity that comes up with said policies is none other than Goldman Sachs, and specifically head economist Jan Haztius. Conveniently, at this critical time to the Fed's rate hike decision, it was none other than Hatzius who moments ago schooled the Fed during the "20th Annual Financial Markets Conference: Central Banking in the Shadows: Monetary Policy and Financial Stability Postcrisis [15]."
Reuters reported the big picture: Jan Hatzius said on Wednesday he believed the Federal Reserve will likely raise interest rates late this year or early next year, given the amount of slack still present in the labor market.
Hatzius, speaking on a panel here at an Atlanta Federal Reserve Bank event, said his view on the timing reflected a significant amount of slack still in the labor market and weak wage growth.
"My own view is that it's not yet time. Certainly not high time yet," Hatzius said, adding that Goldman's forecast for the first hike is for September.
"My opinion in terms of when monetary policy ought to be tightened is very late this year, or early next year."
Amusing that this is the same "analyst" who last year forecast "above consensus" growth in the US. So much for that. However, now that he has been proven wrong once again (recall he did the exact same thing in December 2010 [16]when he went from bearish to bullish just as the Fed was preparing to unleash Op Twist and QE3), it is time to tell the Fed what to do.
Which is precisely what he does in the presentation he delivered earlier today titled "Hiking Rates in the Name of Financial Stability [17]."
Here is the punchline: Goldman's waterfall analysis on what the Fed should think about as it is about to announce a rate hike:
[18]
And while Goldman is ok with layer 1 through 4, the one place that Hatzius tells the Fed to hold back on is item #5: "It the macroeconomy ready?" Goldman's answer: it may not be ready yet.
- While some job market measures such as job openings and headline unemployment have tightened a lot, broad measures such as U6 and E/P still show substantial slack.
- The continued weakness of nominal wage growth supports a focus on broad as opposed to narrow slack measures.
- Core inflation remains well below the 2% target, and only some of this is explained by oil and dollar pass-through.
- The risks to global growth and inflation remain on the downside.
- At the ZLB, hiking too early is riskier than hiking too late.
What is left unsaid that the one place that currently is most at risk from an "early" rate hike (because 7 years of ZIRP is clearly not enough) is Goldman's 2015 bonus pool.