What a difference a little over a year makes.
Back in January 2014, just after the Fed announced the tapering of QE (because, you know, the “date-dependent” Fed would never be tapering if the economy wasn’t improving, right?) the propaganda machine went into overdrive, with Wall Street’s pet economist, not to mention the NY Fed’s key “outside advisor”, Goldman Jan Hatzius preaching that the long awaited recovery had finally arrived.
This is how the tabloid pseudo-finance website Business Insider characterized his call at the time: “Goldman’s top economist, Jan Hatzius, just said the words we’ve been wanting to hear for five years. He believes the economy is now growing at an above-trend pace.”
What exactly did he say? This:
Despite the 1% drop in real GDP in the first quarter, we believe that the US economy is now growing at an above-trend pace. The best way to see this is via our current activity indicator (CAI), which grew at an annualized rate of 3.4% in May, similar to the average of the prior two months. Although an estimated ½ percentage point of this sequential growth is due to a bounceback from the weather distortions of the first quarter, even the year-on-year CAI now stands at 2.7%, the fastest pace of the expansion so far and above our estimate of potential growth of 2%-2½%. In our view, the CAI is a far more reliable indicator of economic activity than real GDP because it is more timely, more broadly based, less noisy, and less subject to revision. One key reason why we expect a further pickup in the underlying growth pace to 3%+ is an improvement in the housing sector.
To be sure, the US economy would have literally cratered just a year later after another first quarter debacle was blamed on cold weather, and only a double seasonal adjustment saved what little was left of “growth” purely on the back of an absolute whopper in record inventory accumulation.
Back then, Joseph Wisenthal, then with Business Insider, and currently in charge of Bloomberg’s hyperbole division, said “For what it’s worth, we agree with Hatzius.”
For what it was worth, we disagreed with Hatzius, noting that this would simply be the second time in five years Goldman has jumped the “recovery” shark after its dramatic reversal in December 2010 when as QE 2 was ending, Goldman once again sought to boost wholesale confidence by going fundamentally bullish and saying “This outlook represents a fundamental shift in the thinking that has
governed our forecast for at least the last five years.”
Fast forward a little over a year when we learn that Goldman was once again wrong (for what it’s worth, naturally Business Insider was too).
First it was in April of 2015 – some 16 months after his “bold” prediction – that the same “above trend growth”-forecasting Hatzius said we “do not have much confidence in the inflation outlook and believe that the right policy would be to put hikes on hold for now.”
But… what happened to above trend growth?
Then in the first week of June, Hatzius once again hedged saying “Our forecast remains that the Fed policy committee will hike rates at the September meeting, but …this remains a close call. There is a strong risk management case for delaying liftoff.” In other words, the market determines Fed policy, not the economy, despite the reflexive lies to the opposite.
Then just two weeks later, on June 18, Hatzius having long given up on his “above trend growth” forecast changed his tune again, and now said he expected a December rate hike instead.
“In large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen…. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, because we did not believe that the FOMC would want to surprise markets on the hawkish side when they raise the funds rate.”
Of course, if the economy had grown at an “above trend pace” since his January 2014 call, the Fed would have to be at 1% or higher by now.
Just to make sure nobody is surprised next week when Yellen does not hike and unleashes a massive relief rally, Hatzius added that a September rate hike announcement this Thursday “shouldn’t be close”, and as we showed previously, unveiled 7 reasons why. Amazing how Goldman’s narrative changes with every month.
And then, the humiliation was complete last night when the same Jan Hatzius, having long-forgotten his January 2014 prediction, in a note previewing the US economy in “September and Beyond” had this to say:
In our view, the recent events have largely sealed the case against a rate hike next week. Fed officials have made clear that “data dependent” policy refers to incoming economic news as well as factors that could impinge on the outlook—including changes in financial conditions…. The news on wage and price inflation, however, has been softer than generally expected a few months ago…. most of the inflation shortfall relative to the Fed’s 2% target is due to more persistent factors, including continued labor market slack.
We expect modest downward revisions to GDP growth in 2016 and 2017 in light of tighter financial conditions.
Hm… maybe Jan meant below-trend growth?
And here we get to the punchline, because Goldman which originally expected a September rate hike, then pushed it to December in June, is now fairly confident that there may not be a 2015 rate hike at all!
Perhaps the biggest question for next week’s meeting will be whether Chair Yellen continues to signal rate hikes later this year, or whether she hints at a lengthier delay.
We see two arguments for why the first rate hike may be delayed beyond December. First, the Taylor rules above do not take into account risk management considerations. We have long seen a persuasive case for delaying rate increases until 2016 on risk management grounds, and recent communication suggests this may be weighing more heavily on Fed officials’ thinking.
That’s that phrase again: just like in June, by “risk management” Hatzius simply means not to crash the market.
And then, now that a September rate hike has been made painfully clear will not be coming (trade accordingly), Goldman pulls out a whopper of an Easter egg:
Although the purpose of raising the funds rate is to tighten financial conditions, markets have already done much of the Fed’s “dirty work.” Indeed, our latest analysis suggests that the recent tightening—if maintained going forward—would be equivalent to around three hikes in the funds rate. Similarly, the GSFCI is now much too tight relative to our “FCI Taylor Rule”, which compares the current level of financial conditions with the “appropriate” level based on inflation and job market slack (Exhibit 11). The easiest way to ease financial conditions—and thereby better align the stance of policy with the dual mandate objectives—would be to signal a later liftoff than markets currently expect.
* * *
we may hear a bit more about risk management in the press conference, and Chair Yellen may make it clear that financial conditions need to improve for the committee to actually hike this year.
The punchline comes from Goldman’s Financial Conditions Index which is now screaming for QE4 or NIRP, pick one:
And there you have it: the “above trend growth” is dead and buried – because 24 months after Goldman’s prediction that the economy is now roaring, Goldman admits the Fed can’t hike even 25 bps.
Which is why one can, and should, ignore all Goldman forecasts about the economy.
What one should most certainly pay attention to, however, is what Goldman says the Fed will do – you know, for “risk management” purposes – because as we have shown countless times in the past, Goldman runs the Fed.
As such, forget a September rate hike. Or perhaps Yellen will listen too carefully to Hatzius and instead of a rate hike, shock absolutely everyone, and instead of a rate hike the Fed will join the ECB, SNB and Riksbank in the twilight zone of negative rates. That, or QE4.
And why not: after both the Swiss National Bank and the Chinese central bank crushed investors who thought the banks would never surprise them, why should the Fed not complete the 2015 trifecta of central bank turmoil? After all, the money printers are already running on “faith” and credibility fumes. Might as well go out with a bang.