Goldman Turns Less Confident On June, September Rate Hikes

zerohedge.com / by Tyler Durden / May 16, 2017 9:07 AM

Following disappointing CPI prints for two months in a row, even such stalwart believers in the Fed’s tightening cycle as Goldman Sachs (recall Hatzius warned recently that the Fed may need to “shock” markets to tighten monetary conditions in light of the S&P relentless grind higher despite rising rates) are suggesting that the Fed’s rate hike trajectory for the rest of 2017 is suddenly in question.

In a note released overnight, Goldman chief economist Hatzius writes that “despite sharply weaker core inflation in the last two months, we continue to expect rate hikes in June and September followed by an announcement of balance sheet runoff in December, as well as a funds rate path well above the forwards in 2018 and beyond.” And whil he sayd that the firm has not “made any changes to these forecasts because the negative inflation surprise has coincided with a roughly equivalent upside labor market surprise” he adds that “the risk to our near-term funds rate view is now slightly greater, largely because the range of plausible outcomes has widened. We have shaved our subjective odds of a June rate hike to 80%, from 90% earlier, and have also become a bit less confident in a September hike. If the outlook deteriorates significantly, the committee might simply delay any further tightening steps.”

What does this mean for the sequence of proposed events between the Fed’s potential balance sheet reduction announcement and future rate hikes: according to Hatzius it means that “even a more modest deterioration could prompt the committee to pull forward the announcement of balance sheet runoff to the September meeting and delay the third 2017 rate hike until December.”

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