Remember when a month ago [5]Goldman "called it" on the question whether there would be a rate hike in 2015, when, in response to the rhetorical question of "What is your own view of the appropriate liftoff date?" chief economist Jan Hatzius said the following:
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.
Well, the gambit worked and while the "rate hike delay thesis" sent markets soaring in October on one after another piece of bad news as "bad news was good news", the tables have now turned, and following the "stellar" October jobs report, it is time to attempt "good news is good news" for a change, and engage in the most hypocritical game of revisionist history, and pitch a rate hike as the bullish catalyst this economy has needed all along - because if only the Fed has raised rates in 2009 instead of engaging in QE2, Twist, QE3 and keeping ZIRP until now, the middle class would be thriving... just ignore the S&P at 2100.
So here comes Goldman, not two months after it said [6]that the Fed should think about easing, with what can only pass for Sunday evening humor saying that 7 years to the day after it landed on the zero bound on December 16, 2008, the Fed will hike because, "the economy might start to overheat by late 2016/early 2017 unless growth slows from the current pace".
And just like that the economy goes from needing "further easing" to being on the verge of overheating.
One can't make it up.
Here is Goldman who did make it up:
Friday’s numbers have dispelled the earlier fears of a sharp labor market slowdown. Although the 271k payroll gain in October benefited from a couple of special factors—including a bounceback in sectors such as retail trade and business services from earlier weakness—the trend still looks to be close to 200k, well above the 85k “breakeven” pace that we think is needed to keep the unemployment rate stable. In the household survey, the headline unemployment rate edged down and the U6 underemployment rate dropped another 0.2pp to 9.8%, on top of the 0.3pp decline in September. We regard U6 as reasonable “shorthand” for broad labor market slack, and it is now less than 1pp above our estimate of its structural rate.
The better data combined with steadfast communication from Chair Yellen have increased our confidence that the FOMC will hike the funds rate on December 16, after exactly seven years at the zero bound. Nothing is ever certain, but it would now probably take major downside surprises in the data or markets to dissuade the leadership from starting the normalization process next month. Barring such surprises, the data over the next month probably matter mostly for the path of rates after the first hike, not the rate decision in December itself.
Is it a good idea to tighten monetary policy at this point? We still have some sympathy for the “risk management” approach recently laid out by Governor Brainard and others. The main reason is that financial conditions look tighter than warranted in the current economic environment and could tighten further as the dollar appreciates. Nevertheless, the case for waiting has become less compelling, as the risks to the outlook have clearly diminished and our baseline view of the economy now implies a clear need for higher rates before long. In particular, the continued rapid pace of labor market improvement—best illustrated by the 1.7pp drop in U6 over the past twelve months—suggests that the economy might start to overheat by late 2016/early 2017 unless growth slows from the current pace. In addition, we expect both core inflation and the equilibrium funds rate to recover gradually in coming years. Putting these pieces together in a Taylor-type rule—even one that focuses on U6, puts greater weight on labor market slack than Taylor’s original formulation, and assumes a depressed near-term equilibrium funds rate—implies that the FOMC should start the normalization process. All in all, we can now see a decent case for a December liftoff.
And this, according to the Fed's 2016 GDP "central tendency" forecast is what economic overheating looks like.
[7]
