Goldman Revises Its Fed Rate Hike Odds After Latest Disappointing Data

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.


Bam_Man Fri, 07/14/2017 - 11:02 Permalink

Fed Funds target has peaked for this "cycle" at 1.00%-1.25%.Incidentally, the current "peak" was the "trough" back in 2002-03.Everything in finance has been turned upside down in less than 15 years.

NoDebt Fri, 07/14/2017 - 11:08 Permalink

"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)"Wait... I don't think you can just add up a series of three discrete probabilities in that way.  Is there a math nerd in the house?  We need a math nerd, please!  (Note if you are a math nerd but afraid to out yourself as such just start your reply with something pithy like "Yes, stewardess, I speak jive!" and nobody will notice.) 

Publicus_Reanimated NoDebt Fri, 07/14/2017 - 13:26 Permalink

Math is hard.I think the author was trying to calculate the probability there will be one more rate hike this year for a total of three since Jan. 1.  It is not safe to say these three possible events are independent of one another, that is the likelihood of any one is not affected by one of the others occurring.  For example, a September rate hike all but excludes a November and most likely excludes one in December.  Independent events can not be mutually exclusive.Also note the probabilities are not static.  If September does not happen, the probabilities for November and December rise.Now, la piece de resistance -- there is no such thing as the "cumulative probability" of a single event occurring.  Cumulative probability calculates the likelihood of multiple events occurring, as in "if I flip a coin three times what is the likelihood it will land heads up twice?" or "If I have three blue marbles and three red marbles, what is the likelihood I will pull two blue marbles in a row?".We want to know the likelihood of one and only one of the following three events:  Sep yes, Oct no, Dec no; Sep no, Oct yes, Dec no; Sep no, Oct no, Dec yes.  The events have a probability of 5%, 5% and 50% respectively.  What if they were 20%, 30% and 50%?  Would the author tell us the "cumulative probability" of one more rate hike in 2017 is 100%?  I don't think so.The likelihood that one and only one of these events will occur is equal to the greatest single likelihood, i.e. 50%.

In reply to by NoDebt

SDShack NoDebt Fri, 07/14/2017 - 13:14 Permalink

You are correct. It is not additive, but multiplied. Using the information from the article the way it is written, I calculate the probability of 3 MOAR distinct rate hikes before the end of the year as 1/800. To illustrate the logic, think of flipping a coin and having heads or tails come up 3x in a row. The probability of each flip is 1/2, and with 3 flips, the odds are 1/2 x 1/2 x 1/2 = 1/8.Now with the rate hikes, the first 5% probability is 1/20. The second 5% probabilty is 1/20. The third probability of 50% is 1/2. Cumulative the probability of 3 rate hikes in a row is 1/20 x 1/20 x 1/2 = 1/800 = .00125. Or .05 x .05 x .5 = .00125. Of course this all assumes a truly random universe with no outside manipulation or influence, so judge accordingly. Thus endith the lesson.

In reply to by NoDebt

NDXTrader Fri, 07/14/2017 - 12:03 Permalink

They are going to be sadly disappointed when the Fed changes nothing in the July statement. The CPI is a joke anyway, and everyone knows it. A .1% miss in July has no effect on what the Fed does from here on out