December 31, GKFX – Goldman Sachs, citing a steepening global economic slowdown and a US economy that could be much closer to steady levels than previously thought, is slashing their rate hike forecast for 2019 from the US Federal Reserve.
A rate hike in Q1 quite unlikely. Our estimates for the probability of hikes in subsequent quarters have also come down to 55% for Q2 (from 65%) and 45% in Q3 (from 55%). We still view the probability of a hike in Q4 as 55%, i.e. slightly more likely than not.
We have also slightly raised our probability of rate cuts to 10% in Q3 (from 5%).These probabilities generate an expected value of 1.2 net hikes in 2019, compared with market pricing of zero hikes. A slowdown is already evident in the numbers. The impulses from fiscal policy and financial conditions are turning more negative.
Fed officials will want to see a significant slowdown in growth
Unemployment is already ¾pp below our 4½% estimate of the rate consistent with a 2% inflation rate in the medium term … other measures of labor market slack confirm the message of labor market tightness.
Given the close correlation between labor market overheating and subsequent recession, Fed officials will want to see a significant slowdown in growth. This means that if financial conditions reverse too much of their recent tightening, Fed officials would likely turn more hawkish to keep growth from rebounding too much.
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