Three weeks ago, at the start of June, we mocked Goldman’s economics team for having come up with “Schrodinger’s Fed Funds”, when with Powell telegraphing an imminent easing cycle, the team of Jan Hatzius et al refused to throw in the towel and change its long-running forecast of no rate cuts in 2019 and one rate hike in 2020 even though at the same time it said that its “modal path” called for at least one rate cut by 2020. In other words, Goldman – which last December predicted 4 rate hikes in 2019 – was hoping to have its cake and eat it too.
This followed just one month after Goldman, whose predictions in recent years have been absolutely disastrous, said that “the next move is more likely to be a hike than a cut, with the next rate increase coming after the election in 2020Q4, followed by another hike in 2021.”
And so, with Powell dropping hint after hint that the hawkish Fed chair of 2018 is no more, and has been replaced with Trump’s spineless footstool, we predicted two weeks ago, on June 7, that Goldman would finally capitulate as the Fed made clear that it is only a matter of time before rate cuts begin.
We were wrong… but by only 12 days because moments ago following today’s capitulation by Powell, Goldman has similarly capitulated and in the latest humiliation for the predictive abilities of Goldman’s economics team, which is now competing with Gartman for batting -1.000, Goldman writes that it now “expects cuts in July and September, as well as an end to balance sheet runoff in July. Our base case is for moves in 25bp increments, but a 50bp cut is possible if the news flow disappoints and/or Fed officials feel compelled to get ahead of bond market pricing (which currently implies a 32bp cut in July). Conversely, the hurdle appears to be very high for the committee to forego a cut in July”
Admitting that its weekend analysis that the Fed would disappoint the market was dead wrong, Hatzius writes that “the Fed… delivered a dovish message, even relative to market expectations” as “seven of the 19 participants projected 50bp of easing this year, and the statement provided an unqualified “will act as appropriate” signal that cuts are now likely.”
Separately, with Powell “strongly suggesting” that runoff will conclude as soon as the Fed delivers a rate cut, Goldman now expects that “the end of balance sheet runoff will be moved forward by two months, with an announcement at the July meeting that halts runoff in early August.”
While it is hardly relevant, considering just how gruesomely wrong Goldman has been about, well, everything, here is Goldman’s take on “what were the most important takeaways from today’s meeting” starting with…