We’re old enough to remember when four rate hikes was Goldman’s base case for 2019.
We jest. Sort of. Goldman hung in a long time last year when it came to clinging to the notion that Jerome Powell would be able to stick to his guns in 2019 despite the market rapidly pricing out tightening over the course of Q4 as stocks plunged and credit spreads ballooned.
Indeed, Goldman was one of the last holdouts when it came to adopting cuts as their base line in June.
That said, the bank has always adopted a somewhat cautious tone on the trade war and even before last week’s escalation, Goldman had 10% levies on the remaining $300 billion in Chinese imports as their base case scenario.
Well, now, Goldman no longer expects a trade deal prior to the election. “We had expected a final round of tariffs targeting remaining Chinese imports at a 10% rate, but news since President Trump’s tariff announcement last Thursday indicates that US and Chinese policymakers are taking a harder line, and we no longer expect a trade deal before the 2020 election”, the bank writes in a note dated Monday evening.
Of course, the worse things get on the trade front, the more convinced the market becomes that more Fed cuts are coming. Indeed, the timing of Trump’s latest escalation (a day after the July Fed meeting indicated policymakers were angling to walk back market expectations for a series of cuts) clearly suggested the US president was attempting to engineer the kind of extreme pricing in rates that makes it virtually impossible for the Fed to disappoint markets without risking an acute tightening of financial conditions.
Read more: Wall Street Is Worried About The Fed’s Role In Trump’s Trade War. You Should Be Too
Goldman has discussed that “hall of mirrors” effect before and now they’re citing it in adding a third rate cut to their official house call on the Fed.
“The Fed has been increasingly responsive this year to trade war threats from the White House, bond market expectations, and global growth concerns [and] since its July 31 meeting, both trade war risks and bond market expectations for deep rate cuts have grown meaningfully”, the bank writes, on the way to delivering the new call as follows:
As a result, we now think the balance of risks has shifted enough to make a third 25bp rate cut in October the most likely outcome, for a total of 75bp of cuts including the July cut. Specifically, for the September meeting we see a 75% chance of a 25bp cut, a 15% chance of a 50bp cut, and a 10% chance of no cut. For the October meeting we see a 50% chance of a 25bp cut, a 10% chance of a 50bp cut, and a 40% chance of no cut.
We are now squarely “in the loop”, so to speak:
What’s it going to take to break the loop and/or for the Fed to extricate itself from the political calculus?
Simple. “For rate cuts to stop, Fed officials will eventually have to withstand White House demands and perhaps bond market expectations as well”, Goldman writes.
Easier said than done.
Poor Powell.