After Yellen's unexpectedly dovish Congressional testimony on Wednesday, Goldman's chief economist, Jan Hatzius, who previously was especially bullish on the US economy and expected as many as 4 rate hikes in 2017, took an axe to its tightening forecast, and noting Janet's latest commentary, said "in our view, this reduces the probability of a July announcement and raises the likelihood of a September announcement. As a result, we now think that there is a 10% (vs. 20% previously) probability that the next rate hike will come in September, a 5% probability that it will come in November, and a 55% (vs. 50% previously) probability that it will come in December. Cumulatively, this implies a 70% probability (vs. 75% previously) of at least three hikes this year."
Fast forward two days, when after today's latest batch of poor economic data, in which both core CPI and retail sales missed, Goldman has again cut its rate hike forecast, and is on the verge of saying that another rate hike in 2017 is basically a coin toss. This is what Goldman said moments ago:
Core CPI inflation was lower than expected for the fourth consecutive month, though the year-over-year rate remained stable and prices in the large and persistent shelter and healthcare services categories both accelerated. Retail sales were weak – with an outright decline in the key control gauge that was four tenths below expectations – reflecting relatively broad-based softness. We adjusted down our Fed odds accordingly. We now believe there is a 5% probability that the next rate hike will come in September, a 5% probability that it will come in November, and a 50% probability that it will come in December (a 60% cumulative probability of at least three hikes this year).
Even with its latest bearish relent, Goldman still remains well above the market, which as we showed earlier expects just over 30 bps of tightening from now until December 2018...
... and well above the market's December implied rate hike odds of 40%.
Which means that the Fed is once again trapped: if Yellen wanted to send a message to the market, and burst the asset bubble, she is left with no way out "thanks" to the data, as any additional rate hikes will be taken as not derived from economic data but purely focused on adjusting risk levels (and financial conditions) something which the Fed has repeatedly stated is not its goal, potentially losing what little credibility it had left with both bulls and bears. That said, now may be a good time for Yellen to withdraw its dot plot which with every passing day is an increasingly more laughable joke.