Goldman: The Fed Probably Thinks That Was A ‘Successful Meeting’

If you ask Goldman, Fed officials are patting themselves on the back after yesterday’s FOMC statement and post-meeting press conference.

That might seem counterintuitive given what happened with the dollar, rates and equities, but if you look at things from the perspective of a desire to try and start nudging markets back towards accepting a more realistic outlook for future easing, you could conceivably argue that Wednesday’s mini-tantrum was worth it.

“The new guidance about both September and the total intended recalibration of policy came as a moderate hawkish surprise to bond market expectations”, Goldman writes, in their full July Fed postmortem, adding that “total pricing of rate cuts through the end of 2020 in the fed funds futures market declined by about 8bp in total”.

Read more: Analysts Pile On After Powell’s ‘Muddled And Confusing’ Press Conference

If you take a look at the breakdown in the 7bp tightening that unfolded in Goldman’s financial conditions index on Wednesday, equities contributed 5bp. To the extent the Fed can live with a bit of FCI tightening triggered by weaker stocks, one could argue the press conference wasn’t a complete debacle.

(Goldman)

Of course, as we saw late last year, once things get going in the “wrong” direction, it doesn’t take long before a pernicious, self-fulfilling prophecy kicks in, as selling begets selling in equities thanks to impaired liquidity and systematic flows and widening credit spreads raise questions about overleveraged corporate balance sheets.

In any event, dour prognostications aside, Goldman suggests that “from the FOMC’s perspective, nudging bond market expectations toward policymakers’ intentions but triggering only a moderate tightening in financial conditions likely constitute a successful meeting”.

The bank still expects a second cut in September, but “sees little need for it”.