Over the past several weeks, as bank after bank threw in the towel and adopted rate cuts as their baseline outlook for the Fed following the Mexico tariff escalation, Goldman didn’t budge.
Although the bank did admit on several occasions that rate cuts were becoming more likely, Jan Hatzius and co. never took the plunge ahead of the June meeting, where that meant adopting cuts as the base case. Goldman was – pardon the Fed joke – “patient”.
That changed on Wednesday evening, at 8:57 PM.
That’s the timestamp on the bank’s June FOMC recap. Here’s Hatzius with the call:
We now expect 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).
Just like the other desks that weighed in following the proceedings, Goldman cites the magnitude of the declines in the dots, as seven participants now see 50bps worth of cuts in 2019. The bank also flags “the unqualified ‘will act as appropriate’ phrase in the statement.”
To their credit, Goldman did say, in their Fed preview, that a lack of qualifiers around the “act as appropriate” language would mark a notable shift. Hatzius reiterates the point as follows:
Although the statement matched our expectations in many areas, it was noteworthy that the phrase “will act as appropriate” was not qualified by the words “as always,” as it had been in Chair Powell’s speech at the Fed conference in Chicago on June 4. As we discussed in our FOMC preview, this kind of language, unless qualified, usually presages policy action.
The bank doesn’t mince words when it comes to how high the bar now is to take a July cut off the table. In the Q&A section of Goldman’s note, the bank asks and answers:
What has to change for the Fed not to cut in July? A lot. The statement prefaced its promise to “act as appropriate” with a nod towards data dependence (“will closely monitor the implications of incoming information”). But while on the surface this would suggest cuts are not a sure thing… nearly half of the Committee is already projecting a cut this year… it seems unlikely that questions about global growth and trade policy will be resolved this summer let alone in six weeks’ time [and] the decline in the median core inflation projection to 1.9% in 2020 suggests the possibility that a continued inflation shortfall at the July meeting could be used to justify a cut.
There’s a ton of additional color in the note, including a discussion of the likely scope of a July cut, what would have to happen to stop the easing cycle and what the outlook is for the balance sheet, but you get the idea. July is a foregone conclusion at this point.
And, on the off-chance Powell doesn’t make good on the promise implicit in Wednesday’s decision and press conference, then he can probably kiss is chairmanship goodbye – or at least based on new reporting outlining Trump’s thinking on the matter.
Read full coverage of the June FOMC: