It seems like just last month when Goldman pulled forward their forecast for the first Fed hike by “one full year.”
That’s probably because it was just last month. Basically.
In the final days of October, the bank shifted their liftoff call to July of 2022, amid signs that central banks were becoming increasingly uncomfortable with surging inflation. “The main reason for the change in our liftoff call is that we now expect core PCE inflation to remain above 3% — and core CPI inflation above 4% — when the taper concludes,” Jan Hatzius said, at the time.
The bank’s liftoff call eventually moved to May. On Thursday, Goldman pulled it forward again, this time to March, citing Powell’s constructive comments on the labor market, and particularly his (implicit) contention that the Fed can’t wait around on the participation rate to rise. “We have to make policy now and inflation is well above target,” Powell said Wednesday.
“We continue to expect inflation to get worse before it gets better, and the FOMC will likely be as concerned, or more concerned, in March relative to today,” Hatzius and David Mericle wrote, adding that “the leadership will surely want to show that it is responding in some way at the March meeting, though this could be either a rate hike or a hint in the statement that a hike is coming at the next meeting in May.”
In other words, March will be a close call, in Goldman’s estimation, but Powell will be feeling the pressure. Especially if inflation does, in fact, “get worse” by then, given the proximity of the midterms.
Note in the figure (above), that Goldman now expects balance sheet runoff to commence in the fourth quarter. That would be during the heat of the moment in terms of political jostling.
Their rationale is straightforward. It’s based on the same interpretation of the Fed’s views on the neutral rate cited by some as a reason for the post-FOMC surge in US equities Wednesday.
“Balance sheet runoff… began last cycle when normalization of the funds rate was ‘well under way,’ which meant four hikes then but might mean three this cycle because the FOMC’s neutral rate estimate is now lower,” Hatzius and Mericle wrote Thursday, on the way to saying they “could even imagine runoff starting after just one or two hikes.”
If that were to materialize, it would conjure comparisons with 2018, although, again (and somewhat ironically in this context), the mitigating factor may be a more cautious approach to estimating neutral. At the least, you can be sure Powell will avoid making any off-the-cuff remarks about how far policy is from neutral this October. It’d be shame if any bubbles were to burst at such a delicate juncture.
The day the Fed starts BS run off will be the day I go overweight the two assets classes I dislike the most, cash and bonds. I’ve seen that movie before and it has a sour ending.
I am always amazed at folks prodding the Fed to run off the balance sheet. Why? If you want to tighten policy just raise short term rates. There is not a lot of experience in history to gauge the effect of run off. Why fly a helicopter when you can use a plane? Planes are easier to fly and less prone to accidents. If you want to avoid balance sheet bloat, just hold the level of the balance sheet steady over a number of years and the growth of the economy plus inflation will shrink the value of the balance in relative terms without rocking the boat. It is startling to hear Wall Street analysts play the role of the “Sorcerers apprentice” when there is not a scant bit of evidence of value to doing so. I am not against tightening monetary policy per se, just do it in the most direct and simple way. If you want out of the mortgage market, just replace the run off of MBS in your portfolio with UST bonds. Sorry boys this is not rocket science.