Goldman: chances of a Fed rate hike this year just 60 percent

October 19, 2015

Dudley shields his eyes as he looks into the audience at the Bretton Woods Committee International Council conference in WashingtonAfter months of speculation and delay, the chances the U.S. Federal Reserve raises interest rates this year are only 60 percent, according to Goldman Sachs chief U.S. economist Jan Hatzius.

The latest comments by his predecessor in the job, William Dudley, now President of the Federal Reserve Bank of New York, added further to doubts an interest rate rise in the world’s largest economy would come by December this year.

Dudley said in an interview last week that was published by a newspaper today it was “too early to think about raising interest rates” given global market turbulence since August and widespread concerns over the world economy.

Declining optimism is now apparent across economists. The latest Reuters poll last week showed just a 55 percent chance of a hike this year compared with 60 percent in a September poll.

Among the biggest concerns is that financial markets have only assigned a roughly 30 percent chance of a hike this year. Some argue that alone is enough to delay.

Goldman explained it this way in its note:

Q: Is the low market-implied probability of a hike in itself a reason not to hike?

A: If we are still around 30 percent on the day of the announcement, then the answer would be yes. We recently showed that the FOMC has a strong revealed preference for seeing rate hike decisions well discounted by the time of the meeting; since 1990, about 90 percent of all hikes were at least 70 percent discounted, and at least the last two “first hikes”, in June 1999 and June 2004, were practically 100 percent discounted.

At the moment, Goldman says their baseline scenario for the U.S. economy is very similar to Fed’s and thus, they, like the Fed, expect a hike in December, “but uncertainty around that forecast still argues for waiting longer.”

If this all smacks of a sense of déjà vu, it’s because we really have seen this before.

The Fed was initially expected to raise rates in June, but Reuters polls in the build-up to that month found economists steadily lowering their conviction rate. The same happened in September. Stay tuned for December.

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