Over the last three weeks, as JPMorgan, Barclays, Credit Suisse, BofA and others began to adopt Fed cuts as their base case, Goldman refused to throw in the towel.
The Mexico escalation was the last straw for a bevy of Wall Street economists and strategists, who all expressed consternation at the read-through of the proposed tariffs for negotiations between the US and other trade partners.
While conceding that the latest trade tensions and the lackluster May jobs report raise the odds of Fed cuts, Goldman’s Jan Hatzius never fully embraced the idea that preemptive easing is now the most likely scenario.
On Monday, Hatzius is out with a note justifying that reluctance.
After discussing the payrolls miss at some length, he writes that the bank’s assumption of a “gentle” slowing in the trend of jobs growth is contingent on the trade war not “spiraling out of control.” He then suggests that Trump’s decision not to impose tariffs on Mexico is a “step in the right direction.”
“President Trump decided once again to step back from the brink in the face of potentially severe economic repercussions [and] while the read-across is imperfect, we think the experience of the past 10 days has made the question whether we will see an across-the-board China tariff an even closer call”, he says, on the way to characterizing the inflation news received since Powell’s “transitory” press conference as “a tad more supportive of Powell’s view that the weakness largely reflects temporary forces.”
As far as a rate cut goes, Goldman says that “although it is a close call, we still expect the FOMC to keep the funds rate unchanged in the remainder of the year.”
Notably, Hatzius didn’t interpret Powell’s comments last week the same way everyone else did. For Goldman, the reference to “act as appropriate to sustain the expansion” was nothing more than a boilerplate line, and “not a strong hint of an upcoming cut”. We suggested as much too, for whatever that’s worth.
Read more: Not-So-Lonesome Doves
After cautioning against the tendency to overestimate the FCI impact from disappointing markets (i.e., the assumed tightening that would accompany a hawkish surprise), Hatzius reiterates a critical point we’ve made time and again over the past two weeks – namely that leaning too dovish or pre-committing to hikes ahead of the G20 is perilous.
“The committee faces a tricky balancing act at its upcoming June 18-19 meeting”, Goldman writes, spelling out the quandary as follows:
On the one hand, Chair Powell and his colleagues need to keep signaling that they would respond to large adverse shocks by easing policy. On the other hand, they will not want to feed the expectation that cuts are imminent, especially as the meeting comes right before the G20 with its potential Trump-Xi meeting and the subsequent US decision whether to go through with the across-the-board China tariff.
The title of Goldman’s note: “No time to panic”.
