Goldman Sachs Analysis: The Case for a Fed Hike Has Collapsed
Jan Hatzius, chief economist at Goldman Sachs, has delivered a clear verdict: a Federal Reserve rate hike in September now appears highly unlikely. This assessment is grounded in three pivotal shifts unfolding within the U.S. economy.
Three Data Trends Converge, Undermining the Rationale
The core of this argument rests on three interconnected economic narratives:
- Cooling Consumer Spending: Momentum in U.S. consumer expenditure is waning, with indicators like retail sales showing slower growth.
- Stalling Labor Market: The previously red-hot job market is nearing a standstill, with sluggish growth in new payrolls.
- Sustained Inflation Improvement: Both CPI and PCE data continue to signal that price pressures are easing effectively.
The convergence of these forces fundamentally undermines the need for further monetary policy tightening.
A "Expectation Gap" in Market Pricing
Despite the shifting fundamentals, financial market pricing for interest rates remains skewed toward a more hawkish outlook, implying traders' expectations for the terminal rate are still elevated. Goldman Sachs sees room for these market rates to adjust downward as economic data continues to evolve.
Goldman's Broader Market Outlook
Aligned with its view on the policy pivot, Goldman Sachs reaffirms its key market forecasts: first, that the U.S. Treasury yield curve will steepen; and second, that U.S. equities are poised to reach new highs before year-end. Regarding the European Central Bank, the firm anticipates a final 25-basis-point hike in September, with the subsequent policy path more likely to involve rate cuts.