Goldman Sachs had forecast
payrolls growth of 165K but despite a worse number at 151K, economists
there have raised their odds of a hike.
They now see a 55% chance of a Sept 21 hike compared to 40%. They see the chance of at least one hike this year at 80%.
the commentary, economist Jan Hatzius said the report was "just enough"
for a large majority of FOMC officials to support at September rate
hike. However they said it would likely be accompanied by dovish
language and a downward revision to economic projections.
After Friday's payrolls miss, the market's initial reaction was to
aggressively fade the probability of a near-term Fed rate hike, as
September odds initially tumbled, only to quickly rebound into the
afternoon. What catalyzed this jump? As we reported at the time, the
move was almost entirely driven by an unexpected note by Goldman's Jan
Hatzius who bucked the trend set by other sellside lemmings, and instead
of punting the September hiking date to December, the Goldman strategist said that the weak jobs report was nonetheless "strong enough" to prompt him to boost his Sept. rate hike odds from 40% to 55%.
Realizing the severity of his prediction, and the collapse in
credibility he would suffer is he is - again - wrong (as we have duly
documented, the past two years have been absolutely abysmal for Goldman
predictions and recommendations), earlier today Goldman took time away
from his holiday schedule and penned a note to explain why he is
confident that, contrary to every other forecaster, he expects a better
than even chance of a rate hike to be announced in just over two weeks
when the Fed meets on September 20-21.
As he puts it, Yellen’s Jackson Hole speech used "blunt language" for
a Fed chair, "which would have been unnecessary if she was only trying
to convey a general sense that rates would be moving higher over time,
or to signal a potential hike that was still 3½ months away. There are
plenty of other opportunities to prepare markets for a move before the
Just as important was Goldman's take on the the consensus call that
the Fed would not hike until the election. As Goldman rhetorically puts
it, "wouldn’t the tactics favor waiting until December given the
presidential election?" To which it responds: "This is a widespread
view, but we have not found much evidence that the election calendar has
an impact on monetary policy—the Greenspan Fed started to tighten in
June 2004 and continued to move right through the election, and the
Bernanke Fed announced the then-controversial QE3 in September 2012, not
So just maybe, Yellen (and Goldman) may have it in for Hillary. The
rest of Hatzius' contrarian reasoning is laid out in the following
rhetorical Q&A dubbed "Why September?"
For the sake of what little is left of his credibility, we hope he is correct this time.
From Goldman Sachs:
Today we depart from our usual US Views format and discuss the outlook for Fed policy in Q&A format.
Q: You moved up your probability of a hike at the September
meeting to 55% on Friday despite a below-consensus payroll number. Why?
A: Largely because the speech by Chair Yellen at Jackson Hole
suggested a relatively low bar for this report. She said that “in light
of the continued solid performance of the labor market and our outlook
for economic activity and inflation, I believe the case for an increase
in the federal funds rate has strengthened in recent months”. The
condition was that the data must “continue to confirm” the committee’s
outlook—not a very stringent test, in our view, because it signals a
predisposition to think that the outlook is on track.
Q: What makes you think Chair Yellen meant a hike in September, not December?
A: Two things. First, nothing happens without a good reason in these
speeches, especially as far as monetary policy signals are concerned. The
phrasing “case…has strengthened” was blunt language for a Fed Chair,
which would have been unnecessary if she was only trying to convey a
general sense that rates would be moving higher over time, or to signal a
potential hike that was still 3½ months away. There are plenty of other
opportunities to prepare markets for a move before the December
Second, when Vice Chairman Fischer was asked by Steve Liesman on CNBC
later that day whether the “strengthened” comment meant that we should
be “on the edge of our seats for a rate hike next month” (i.e. in
September), he answered “what the Chair said today was consistent with
answering yes”. This wording sounded like a deliberate signal that both
of them, not just Fischer personally, think September is on the table
for a hike.
Q: Did this shift come out of the blue?
A: The strength of the message surprised us, but we don’t think it
came out of the blue. Back in the spring, the committee was ready to go
in June or July, but then the weak May payroll report and the Brexit
vote interfered. Now both of these worries have dissipated, the labor
market has made further headway, financial conditions are easier than
they were three months ago, and no major new risks have appeared. If
they thought a hike made sense then, it should make more sense now. In
this context, it is also noteworthy that the number of regional Federal
Reserve Bank boards asking for discount rate increases—a barometer of
policy sentiment within the system—has risen further in recent months
and now stands at 8 (the highest since December).
Q: Did Friday’s payroll data clear the bar?
A: It is a closer call than we’d like, but on balance we think so.
First, even the 151k August number in isolation is well above the
“breakeven” pace—the number that Fed officials believe is consistent
with unchanged labor market slack in the medium term—of less than 100k
per month. Second, the longer-term trend measures such as the 3-month
average (232k), 6-month average (175k), or 2016 year-to-date average
(182k) are all higher. And third, preliminary August payroll numbers
have had a tendency to surprise on the downside initially but ultimately
to be revised higher, by an average of 71k since 2011; Fed officials
are undoubtedly aware of this.
Q: What about other indicators?
A: They have been mixed to slightly weaker. On the labor market, the
August household survey was a bit soft, with a flat 4.9% unemployment
rate, but jobless claims remain low and household labor market
assessments have improved further. On growth, the manufacturing surveys
for August weakened, but GDP tracking estimates for the third quarter
have been moving higher—our own estimate is 2.9% now, the NY Fed is at
2.8%, and the Atlanta Fed at 3.5%. On inflation, the latest core PCE
number was only 0.1% but the year-on-year rate still stands at 1.6%. And
on wages, Friday’s average hourly earnings number was only 0.1%
month-to-month, but we think it was held back by calendar effects (our
forecast was 0.0% for that reason); moreover, our broader wage tracker
stands at 2.6% and still signals gradual acceleration. Overall, we think
these numbers are probably sufficient to “continue to confirm” the
committee’s outlook, alongside the more important payroll numbers.
Q: Many market participants believe that the talk about
September was only an attempt to “create optionality” in case the data
were very strong and the committee felt it had no choice but to hike. Do
you agree with that?
A: Not really, because it overstates the FOMC’s sensitivity to one
single month of data, or maybe even one release. It is very rare for one
strong payroll number to turn the committee from wanting to stay on
hold to feeling they have to tighten now. (There is an asymmetry here,
as one very bad payroll report in early June was largely to blame for
the committee’s change of heart about a June/July hike even before the
Q: Wouldn’t the tactics favor waiting until December given the presidential election?
A: This is a widespread view, but we have not found much evidence
that the election calendar has an impact on monetary policy—the
Greenspan Fed started to tighten in June 2004 and continued to move
right through the election, and the Bernanke Fed announced the
then-controversial QE3 in September 2012, not December.
Q: How much does it matter if they go in September or in December?
A: In the grand scheme of things, not much. But September does have
some tactical advantages if they think a move sometime this year is very
likely. It would avoid the need to first go through yet another press
conference meeting with no hike, yet another reduction in the projected
funds rate path—at a minimum to a one-hike baseline for 2016—and yet
another labored explanation why holding off now does not mean that the
plan for higher rates has been abandoned. Many market participants
believe that the FOMC likes to talk about hiking soon but ultimately
always flinches. A hike in September would undermine this narrative.
Q: If they do go, how much would financial conditions tighten?
A: This is of course uncertain. As a starting point, our research has
shown that a funds rate hike on average tightens financial conditions
by about 20bp. The variation around this is obviously large, and there
is some (weak) evidence that the effects are bigger in an environment of
greater global monetary policy divergence. But we would keep two things
in mind. First, our FCI is now almost 50bp easier than on May 18, the
day the hawkish April FOMC minutes were published. So there is some room
for FCI tightening before it looks worrisome. Second, we think the
committee would combine the hike with a reduction in the projected path
for the funds rate to a one-hike baseline for 2016, i.e. a message that
the Fed is done for the year, as well as a downgrade in the assessment
of the stance of monetary policy from “accommodative” to “moderately
accommodative” or the like. We think this could help keep the FCI impact
Q: Why do you think the market is only pricing a 30% probability of a hike?
A: Part of the reason is that the recent data have been a bit softer.
But the more important factor may be that markets have short memories,
and fading the Fed’s willingness to tighten has been a winning trade all
year. That is our best explanation for why the initial response to
Chair Yellen’s Jackson Hole speech, in particular, was so small. The
market only moved significantly after the Fischer interview, and even
that move was largely reversed in the following days, on little new
Q: Would the committee move in September if market pricing stays where it is?
A: Probably not. Historically, 90% of all hikes have been at least
70% priced on the eve of the meeting. We don’t think this is a hard and
fast threshold, but suspect that the committee would want the
probability to be materially higher than the current 30%. So we would
probably need to see some hawkish Fedspeak between now and the start of
the blackout period on September 13 to keep the chance of a hike alive. A
signal that the August employment report showed sufficient employment
growth to confirm the committee’s baseline outlook might be enough to
shift market expectations toward a hike at the September meeting.
In terms of opportunities for providing such a signal, there is not
very much on the calendar at the moment—speeches by Presidents Williams
(September 6) and Rosengren (September 9) as well as Congressional
testimony by Presidents George and Lacker (September 7). However,
unscheduled press interviews are always possible.
Q: How confident are you that we will see that?
A: Not very confident, or else our probability would be higher than
55%. That said, we are much more confident (80%) that there will be a
hike before the end of the year.