Financial markets appeared to breath a sigh of relief after Federal Reserve Chairman Jerome Powell’s speech in Jackson Hole late last week, with bond yields declining and stock market indexes hitting record highs.
But the consensus view of a kinder, gentler Fed is mistaken, Goldman Sachs said, in a new research note.
“Unlike the bond market, we did not view Powell’s speech as dovish…our forecast remains another two [quarter-point] hikes this year and four hikes in 2019,” said Daan Struyven, senior economist at Goldman.
That is not the pace of hikes the market is expecting.
Investors expect a “go-slow” Fed, with a rate hike in September, but only two more after that for the next year, said Nicholas Colas, co-founder of Datatrek.
Read: Powell still expects gradual pace of interest-rate hikes
What were investors missing from Powell’s remarks?
Goldman pointed out that Powell referred several times to a research study by a group of top Fed economists that was posted on the Fed’s website.
The technical research paper leans in the hawkish direction, appearing to argue that the Fed can’t be content to sit on its hands when the unemployment rate is this low, even though inflation remains well-behaved.
Goldman said the study was consistent with its call for steady Fed rate hikes.
But other economists argued Powell did not embrace the Fed board staff study.
Krishna Guha, vice chairman of Evercore ISI, argued that Powell displayed more dovish sympathies.
Guha said it was puzzling why the hawkish Fed study was published. He said Powell might be seeking the middle ground, between staff economists that believe low unemployment leads to higher inflation, seen in the Phillips Curve, and “new economy thinking” among many regional Fed presidents, who think that factors like demographics and globalization are holding inflation down, limiting the need for aggressive rate hikes.
“It may still suit the chairman to position himself between more traditional staff views and more new economy type thinking among many [Federal Open Market Committee] participants, particularly of the “B-school” variety,” Guha said.
Neil Dutta, head of economics at Renaissance Macro Research, said Powell is taking a wait-and-see approach.
This means two more rate hikes this year are “baked in the cake,” but only two hikes in 2019, Dutta said.
Don’t expect the Fed to try to clear up any confusion over the outlook for policy, said Lou Crandall, chief economist at Wrightson ICAP.
“The Fed wants to get out of the forward guidance business at this stage of the business cycle,” he said.
The yield on the 10-year Treasury note
TMUBMUSD10Y, +0.06%
has moved a little higher this week after dropping on Friday, but remains well below 3% seen earlier in the summer. The Dow Jones Industrial Average
DJIA, +0.25%
continued to move higher since Powell’s speech while the S&P 500
SPX, +0.50%
and Nasdaq Composite Index
COMP, +0.84%
race toward fresh record highs.
Source : MTV
