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Goldman Sachs throws in towel on four Fed hikes in 2019. But there are still some holdouts
Published: Dec 10, 2018 10:57 a.m. ET
As financial markets now price in the likelihood that the Federal Reserve will only lift interest rates one time next year, Goldman Sachs has succumbed to the idea that the central bank won’t hike interest rates every quarter.
The Federal Reserve will pause from raising interest rates next March, and as a result will only tighten three times next year, said Jan Hatzius, chief economist at Goldman Sachs, in a note to clients.
“We think the probability of a move in March has now fallen to slightly below 50%,” Hatzius said.
Part of the reason for fewer Fed rate hikes is the stock market’s SPX, +0.26% recent weakness, he said. Financial markets have already delivered restraint, meaning the Fed doesn’t have as much work to do in pushing up the funds rate, he said.
The Dow Jones Industrial Average DJIA, +0.23% had its worst week last week since March 23, losing 4.5%, and has dropped for the three of the last four weeks.
Fed officials “tend to downplay this link” to markets in their public commentary because they don’t like talk of a “Fed put” or the idea that Fed officials let the stock market dictate policy, he said.
“Nevertheless, we think they do — and should— respond to the economic implications of material and sustained changes in financial conditions by adjusting the funds rate path,” he said.
Hatzius said he disagreed with the market’s forecast of less than one full hike in 2019, saying the economy will continue to grow above trend for most of the year.
The likelihood of sizable rate cuts or a recession “remains quite low,” he said.
Goldman was not alone in its four-rate-hike call. JP Morgan Chase and Barclays believe the Fed will stick to the one-rate-per-quarter pace.
“I think the economy looks fine. The labor market continues to tighten and we think that is going to persist. Inflation is going to firm a little from here,” said Michael Feroli, chief economist at JP Morgan Chase.
Jonathan Millar, senior economist at Barclays, agreed: “We don’t think the Fed has changed its fundamental approach. We suspect there will be more substantial declines in the unemployment rate” than the Fed has forecast, he said.