US: The risk of a reversal – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 23, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Goldman Sachs, suggests that the Fed officials continue to signal rate increases for later this year, but financial markets are increasingly focused on the risk of a policy reversal.

    Key Quotes

    “Market pricing implies only about a 50% chance of a rate hike in 2016, and a 30% chance of a cut. Even considering downside risk scenarios, markets may be overestimating the chances that the Fed reverses course.

    Policy reversals—lowering rates shortly after an increase, or raising rates shortly after a cut—are surprisingly uncommon in the data. Across G10 economies since 1990, we find only five policy reversals in 85 cycles—the other 94% of the time policy trends continue for at least a half year.

    Academic research suggests two reasons for the infrequency of policy reversals in the data. First, central bankers may be averse to changing course for communication- and credibility-related reasons. Second, the tendency toward gradualism—changing policy incrementally in response to incoming data— creates optionality, and helps avoid reversals.

    Outside of a recession scenario, the hurdle for Fed rate cuts any time soon is quite high, in our view. However, a reduction in the “dots” at the March FOMC meeting would be a natural response to recent market developments.”
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