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Fed lift-off coming in December – Goldman Sachs

FXStreet (Delhi) – Jan Hatzius, Research Analyst at Goldman Sachs, still expects a rate hike at the December FOMC meeting as the leadership has signaled that such a move is likely if the economy and markets evolve broadly as expected, and our forecast is similar to theirs.

Key Quotes

“However, we are only about 60% confident. Most of the uncertainty relates to the possibility that the economic and market environment—or in a broad sense, “the data”—will be worse than the FOMC’s (and our) expectations.”

“The low market-implied probability of a December hike of only 30%- 40% probably reflects a mixture of concerns about the data (which we find reasonable) and a belief among some market participants that the FOMC will find an “excuse” to stay on hold even if the economy does fine (which we find unreasonable). The low market-implied probability is not a problem now, but Fed officials will need to find a way to move it much higher by the time of the meeting if they really do want to hike.”

“Our own view is that it might make sense to start normalizing in December if we were perfectly confident in our baseline forecast for the economy. But uncertainty around that forecast still argues for waiting longer. The main reason is risk management. At or near the zero bound and with inflation well below target, easing policy in response to a renewed negative shock is both harder and more urgent than tightening in response to a positive shock. This means that there is a greater-than-normal incentive to avoid anything—such as an interest rate increase that ultimately turns out to be unwarranted—that could generate a negative shock.”

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