If you ask Goldman, there’s something to Jerome Powell’s newfound affinity for the word “expeditiously” when it comes to describing the appropriate pace for returning US monetary policy to a more neutral level.
“Our best guess is that the shift in wording from ‘steadily’ in January to ‘expeditiously’ today is a signal that a 50bps rate hike is coming,” the bank’s Jan Hatzius and David Mericle said, in the course of changing their Fed call following Powell’s remarks at the NABE conference on Monday.
Now, Goldman expects 50bps hikes at both the May and June meetings, with another four 25bps hikes through year-end, and a trio of additional moves next year (figure below).
Considering Powell’s unapologetic cadence, Goldman no longer believes an announcement of balance sheet runoff is an obstacle to a 50bps hike. In other words: The May meeting could be remembered for a simultaneous 50bps hike and QT unveil.
The Committee may attempt to remove some of the risk to markets by telegraphing runoff parameters (e.g., caps) in the March minutes. That way, “the official announcement in May might not be such a major event,” Goldman said.
Note that with Monday’s surge and Tuesday’s early extension, two-year US yields were on track for their largest quarterly advance in almost 40 years (figure below).
In what appeared to be an unscheduled cameo on Bloomberg Television (it wasn’t on the weekly event calendar I consult), Jim Bullard said the Fed needs to “move aggressively” to get inflation under control.
Bullard, who dissented last week in favor of a 50bps hike, said larger moves could “definitely be in the mix” going forward. The Fed, he said, “can achieve a soft landing.”
Writing in the same note cited above, Goldman’s Hatzius and Mericle called the war in Ukraine and a prospective overshoot in financial conditions “meaningful downside risks” to their new forecast for two 50bps hikes, but wrote that “neither looks like an obstacle at this point.”
4 thoughts on “Goldman Changes Fed Call As Two-Year Yields Surge Most Since 1984”
I’ve archived a small library of economic finance over the years, and came across what was once considered the most reliable defacto method for looking at recession.
It’s the spread between 10 year treasury yield and 3 month bill.
I ran that at Fred and saw not the slightest hint of future looking trouble. It alarming that some rates are edging up, but this post pandemic stuff seems extremely unlike the late 70s.
Nonetheless , I think this is a whipsawing environment filled with extremist alarm and anxiety which may provide the groundwork for longer term instability. Hopefully, that mindset won’t add fuel to the fires, because it’s still likely there’s a transitory component related to bottleneck induced inflation.
Once bottleneck distortion kinks are unwound we’ll be left with housing distortions which are more related to longer term structural demographic dynamics that essentially were supercharged during the pandemic. I think a lot of inflation components will subside but housing demand will intensify, regardless of anything related to the Fed, for many, many years.
Good commentary. If you take a look at housing with a longer time frame- about 20 years the price increases are not so extreme. What seems to happen is over that 20 years you get a few bursts higher, and a correction or two depending on your local market, and slower increases the rest of time. When I took a look at price increases in my neck of the woods they approximated 4% if you smoothe them out- which is pretty close to nominal gdp growth in that time frame. That seems right to me even if currently you are looking at some really high numbers for housing in the last 2 years.
The US should be providing a path to allow any displaced Ukrainians to immigrate to the US. Especially if they will be entering the US workforce.
Housing will be an issue- but this is solvable.
Growing our economy out of the excess debt added during covid seems like a good, long-term solution.
H-Man, bonds are being crushed and that party is far from being over. This is an obstacle that is not going away anytime soon.