Goldman pushes Fed rate hike to December after cooler inflation

Investing.com -- Goldman Sachs has pushed back its forecast for the next Federal Reserve rate hike from October to December following a softer-than-expected August inflation reading, while warning that the tightening cycle may already be over.

The core PCE price index rose 0.25% in August, slightly below expectations. More importantly, the annual rate fell to 3.01%, well below forecasts. The decline was partly driven by methodological revisions to the portfolio management component that resulted in a larger-than-expected downward revision to earlier readings.

The data initially rippled through rate markets, but the reaction in longer-dated Treasuries was more complicated. The iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) was trading lower Wednesday as the 10-year Treasury yield remained around 5.3%, near its highest level since 2007. The yield briefly reached 5.304% on Wednesday after hitting 5.293% Tuesday.

Shorter-duration instruments tied more directly to Fed policy expectations have shown a clearer reaction. CME FedWatch data showed markets pricing roughly a 35% probability of a December rate hike, making futures pricing a key gauge of how investors are absorbing Goldman’s revised outlook.

Goldman Chief Economist Jan Hatzius said Wednesday that the latest inflation data, combined with comments from New York Fed President John Williams, had changed the firm’s view.

"Coupled with comments from New York Fed President John Williams yesterday, we now think that an October hike is unlikely," Hatzius wrote. "We are pushing back the second hike in our forecast to December, and we see a strong chance that the FOMC will ultimately conclude that additional rate hikes are unnecessary."

Williams said Tuesday that monetary policy is in a good place and that the Fed should proceed carefully as inflation moves in the right direction.

Goldman’s revised forecast also reflects a more benign view of inflation. Hatzius said the firm now expects core PCE to grow 3.0% on a fourth-quarter-over-fourth-quarter basis, below the Fed’s median forecast of 3.4%.

The broader economic data painted a more complicated picture. The Bureau of Economic Analysis’s third estimate of second-quarter real GDP showed growth revised up 0.7 percentage point to a 2.2% annualized rate, according to Goldman, largely reflecting stronger consumption and investment. First-quarter GDP was also revised higher, by 0.4 percentage point to 2.5%.

The personal savings rate was revised higher as well, reaching 4.1% in August. That suggests households have somewhat more of a financial cushion than previously estimated and could help sustain consumer spending.

There were weaker signals elsewhere. The goods trade deficit widened more than expected in August, prompting Goldman to trim its third-quarter GDP tracking estimate by 0.1 percentage point to 3.3%. The revision reflected weaker advance economic indicators, partly offset by firmer income and spending data.

The result is a potentially favorable combination for markets: cooling inflation, a Fed that may be nearing the end of its tightening cycle and an economy still growing at more than 3%.

The next major test for Goldman’s outlook will be Friday’s jobs report, followed by the September CPI report and the October FOMC meeting. A weaker-than-expected labor market could further reduce pressure on the Fed to hike, while a strong payrolls report would give policymakers another reason to keep tightening on the table.

Original Article

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