Fed policy ahead of Jackson Hole – Goldman Sachs

Research Team at Goldman Sachs, continue to see a subjective 30% probability that the Fed’s next move is a hike at the September meeting and a 45% probability that it is a hike in December, for a 75% cumulative probability of at least one rate increase this year.

Key Quotes

“Both the July minutes and recent comments by individual Fed officials suggest that the committee is planning to hike soon if conditions evolve as expected.

The economic data are likely to strengthen the case for another move, if not in September then by the end of the year. Our analysis suggests that the sharp drag from financial conditions that weighed heavily on growth until recently is giving way to a moderate boost. This has already helped push our current activity indicator (CAI) up to 2.4% in July, the best pace since October.

In contrast to the somewhat hawkish near-term guidance, the Fed’s discussion of the longer-term funds rate outlook remains very subdued. In the September “dot plot”, some officials might lower their projections for the longer-term level of the funds rate further. The committee might also downgrade its assessment of the current stance of monetary policy from “accommodative” to “modestly accommodative” on the heels of the next hike.

The Jackson Hole symposium is likely to feature a discussion of changes in the broader monetary policy framework, along the lines discussed by San Francisco Fed President Williams this week. However, we do not expect big changes anytime soon. Fed officials are only in the very early stages of this discussion, these changes would be difficult to implement, and the behavior of the economy itself may make them appear less urgent—at least under our forecast.”