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FOMC: Road map to hikes in March and beyond – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 21, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that the FOMC raised its target range for the federal funds rate to 0.25-0.50%, shifting attention to the pace of subsequent hikes.

    Key Quotes

    “While the median dot indicates a further 100bp increase in the funds rate in 2016, implying a second hike in March, the market is skeptical. In this week's Analyst, we provide a road map to a March hike and assess how confident investors should be in the FOMC's four hike baseline for 2016.”

    “We see a fairly easy path to a second hike in March. We expect growth to remain above trend and employment gains to remain well above the "breakeven" rate. Most importantly, inflation is likely to rise by March as sharp declines in energy and health care prices drop out of the year-on-year calculation, supporting the Fed's expectation that inflation will pick up as transitory pressures fade.”

    “Looking beyond March, a standard reaction function coupled with the Fed's economic projections calls for a roughly 125bp increase in the funds rate by end-2016. While the FOMC's preference for a "gradual" path of hikes suggests that four is most likely, the economic case for the full 100bp hike implied by the dots is strong.”

    “We estimate the odds of a March hike and four hikes by end-2016 using the Fed's FRB/US model to simulate a range of economic outcomes centered on the Fed's baseline with the uncertainty calibrated to the 1995-2015 period. We find that, conditional on this baseline, the odds of a March hike are about 80% and the odds of four hikes by year-end are about 66%. The mean outcome depends strongly on our assumption about the maximum plausible number of hikes; a speed limit of 100bp implies a mean increase of 70bp in 2016, while a limit of 150bp implies a mean increase of 100bp.”

    “If the FOMC were to impose an additional requirement that realized inflation must exceed a cutoff, the odds of hiking would fall. While the impact on March would be small, the odds of subsequent hikes would likely decline more meaningfully.”
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