FAST FIVE: Goldman: Here's Why The Fed Is About To Shock The Market
Rather than Goldman's standard “Then and Now” table, the chart below “plots the setup for next week's meeting across three dimensions, as well as their averages ahead of three major dovish shifts: September 2007 (at which the Fed abandoned the hiking bias and cut 50bps in response to subprime turmoil), September 2010 (formally signaled QE2), and March 2016 (scuttled the hiking cycle until global risks abated).
Looking ahead, the inflationary outlook is even more conflicted, and Goldman believes core PCE inflation is on its way back to 2% by late 2019, especially given the 0.3-0.4% boost from tariffs that is expected to hit shortly after Trump hikes tariffs on the remaining $300BN in Chinese imports.
But while all this is known, why is the market pricing in roughly 4 rate cuts by the end of 2020, and why does Goldman refuse to drink the Dove-Aid.
Case in point: market pricing implies four rate cuts by the end of next year, a sharp divergence to the FOMC's median projection at that horizon (one hike as of March).
For example, we take much less signal than other commentators and market participants from Chair Powell's promise that “as always, we will act as appropriate to sustain the expansion.” In our view, this was not a strong hint of an upcoming cut but was simply meant to provide reassurance that the FOMC is well aware of the risks.