Goldman: Following the large market reaction to Chairman Powell’s speech on Wednesday, we consider how much more dovish Fed commentary has become recently.
1. It is true that Fed commentary has shifted
somewhat in a dovish direction. The emphasis appears to have switched from a
need for restrictive policy to a stronger focus on data dependence.
Additionally, the tone on inflation expectations may also have shifted somewhat
in a dovish direction.
2. However, we think that markets have
overstated the extent of the shift since early October for three reasons.
First, markets put too much weight on Powell’s comment that “We’re a long way from
neutral at this point, probably”; we don’t think this was meant to imply a more
hawkish view than the dot plot. Second, many commentators misleadingly
shortened Powell’s formulation on Wednesday that interest rates remain “just
below the broad range of estimates of the level that would be neutral for the
economy” to “just below…neutral”. Third, the Fed’s message on the state of the
economy, the growth outlook, and the positioning of gradual rate hikes is
essentially intact.
3. Overall, we see a larger risk of continued
near-term dovish signals and a risk of a downward drift in the December SEP
dots to a two-hike 2019 baseline, especially if the data were to disappoint.
The November employment report on December 7 is particularly important in this
regard, following the recent increase in jobless claims.
4. Looking beyond the next few weeks, recent
events have increased the downside risks to our baseline forecast of quarterly
hikes through end-2019. However, with growth still well above potential and
encouraging signals on consumer spending, we think the unemployment rate is
still on track to fall well below the FOMC’s 3.5% end-2019 projection, which
would likely keep the Fed on a continued hiking path
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