Goldman Sachs cuts odds of US rate hike in September to 25% from 40%

Goldman Sachs has cut its odds of US rate hike next week to 25% from 40% and lifted its odds that the next increase will come at the December meeting to 40% from 30% following a series of mixed comments from Federal Reserve officials that culminated in governor Lael Brainard’s speech on Monday.

Together, the changes lower Goldman’s cumulative odds of at least one increase this year to 65% from 70%.

“Policymakers expressed a wide range of views, but a common element was the lack of a clear signal that the FOMC is prepared to raise rates as soon as next week’s meeting. If action were likely, we would normally see an effort to raise market expectations, such that a rate increase did not startle markets. Thus, the lack of a signal is meaningful, and lowers the probability of an increase,” the bank said.

Goldman said it was reluctant to cut its subjective probabilities further given uncertainty about the committee’s basic framework.

"While participants’ recent arguments for and against further tightening mirror those made in the pre-liftoff debate, we find the generally in-line performance of the economy this year difficult to square with the policy path that the FOMC has chosen.”

Based on the June dot plot and what Fed officials have said in recent months, the bank reckons there are eight Fed officials who would prefer to raise rates this month (including four voters), and four who would prefer to wait (including two voters).

“The views of the remaining five officials (four voters) are unclear, but we had thought Chair Yellen was leaning toward a September increase, based on her comments at the Jackson Hole Symposium, as well as the two-hike baseline in the June Summary of Economic Projections (SEP).

“The lack of a coordinated signal from Fed leadership in recent days suggests this is no longer the case or was never the case to begin with and that Chair Yellen herself favours standing pat.”