Two weeks ago, and just before Janet Yellen hinted that "nominal interest rates cannot go much below zero" [9] (so just a little, and exactly is a "little" in Fed speak?) Goldman explained that when it comes to a rate hike, the Fed should not only not hike in December (and certainly not October), but wait until mid-2016 before the first rate hike:
Q: What is your own view of the appropriate liftoff date?
A: Our own answer to that question has long been 2016. In fact, our own view is similar to that of Chicago Fed President Charles Evans, who recently shifted his call from early 2016 to mid-2016. Although it is definitely possible to rationalize a December 2015 liftoff using various forms of the Taylor rule, there are two good reasons to delay the move longer. First, the risk of hiking too early is bigger than the risk of hiking too late when inflation is so far below target and we have spent so much time stuck at the zero bound. Second, we have seen a sizeable tightening of financial conditions. At this point, our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favor of waiting well into 2016.
Then overnight, Goldman's Jan Hatzius whose calls on an economic rebound and "above-trend" growth have been premature again and again, but whose calls on what the Fed should do are usually followed to the T by former Goldmanite and the person in charge of the NY Fed Bill Dudley, came out with another stunner.
After looking at the latest terrible US economic data which once again crushed hopes of a "decoupling", first confirmed by the terrible payrolls report and subsequently validated by the Atlanta Fed cutting its Q4 GDP from 1.8% to 0.9%, Goldman had this to say:
Further bad news on output and employment could potentially result in quite a large shift in the monetary policy outlook. When the starting point for growth is far above trend, a given slowdown merely delays the point at which the labor market hits full employment, inflation pressure rises more significantly, and standard monetary policy rules call for liftoff. But when the starting point for growth is only modestly above trend, as it probably is right now, the same slowdown might halt the move toward full employment and greater inflation pressure entirely. In that case, standard monetary policy rules might justify a continuation of the current zero-rate policy for much longer, well into 2016 or potentially even beyond. In this context, it is interesting that the reduced market-implied probability of liftoff in 2015 after Friday’s weak employment report mostly translated into a higher probability of liftoff not in 2016 but in 2017!
So for anyone still confused why the USDJPY carry trade is on fire today and is propping up the broader market, even as such "growth" stalwarts and AAPL, NFLX and VRX are in the red with the third quarter earnings season about to begin and confirm not only a revenue but an earnings recession, there is your answer.
