Goldman yesterday downgraded their odds for a September Federal Reserve hike to 40% from 55%.
We could be wrong, but we think 40% is still absurdly high. They (the Federal Reserve) are scared to death. And for no good reason this time. Last September, they had a 1,000 point Dow drop fresh on their mind, an EM FX bloodbath, and a belligerent China to worry about. Now their only excuses are lackluster productivity and a bad ISM print – hardly anything to write home about.
But, what they do have is the US election to consider. This is the most divisive, controversial election in recent memory and it’s not entirely clear that the FOMC wants to exacerbate that tension by tightening financial conditions ahead of December. If Trump wins, populism wins and so does nationalism. Say what you will politically, but that’s bad for global trade.
(Chart: Morgan Stanley)
And what’s bad for global trade, is generally bad for global growth and aggregate demand. Here’s the latest musings from Goldman:
“Fed in the driver’s seat The implied probability of a hike at the September FOMC meeting has fallen to around 15% from 32% on Friday. This decline came on the back of a weak ISM nonmanufacturing print on Tuesday (September 6) and the lack of new information in the speech from San Francisco Fed President Williams. The market was looking for clearer hints on the possibility of a hike at the upcoming FOMC meeting, which did not materialise. That said, the tone of the speech remains positive, and supportive of
a near-term hike and a lower neutral rate, in line with Fed communication since the Jackson Hole symposium.”
“Interestingly, since the FOMC raised the policy rate last December, the market has sequentially lowered the probability of a hike at the next meeting with a press conference. Exhibit 1 shows that, on 16 December 2015, the market was assigning a 41% chance of a 25bp increase in the federal funds rate at the 16 March 2016 meeting. On March 16, the market assigned a 38% probability of a hike at the June meeting. On 15 June, the probability of a hike at the September was 24%. Contrary to what happened last year (Exhibit 2), when the Fed was able to guide the market to re-price sequentially higher the probability of a hike at the following FOMC meeting with a press-conference (i.e., making that meeting live), this year the market is sequentially downgrading this possibility.
Ummm.. yeah guys. It’s called “credibility loss.”