In recent weeks, Goldman Sachs has gained prominence by being the only bank left standing in its confidence that the Fed’s forecast of 2 rate hikes in 2016 is wrong, and instead is sticking with its hawkish prediction of at least 3 rate hikes for 2016. This also explains why Goldman has been pounding the table on long US dollar bets, which incidentally have led to major losses in the past three major central bank announcements, two from Mario Draghi and one from Yellen.
Which is why we were curious how Goldman would reconcile the latest “dovish” shocker from Yellen which has unleashed a dramatic buying spree of all risk assets (as of this moments the S&P500 is trading at a 23x LTM GAAP P/E), with Goldman’s hawkish bias.
For those strapped on time, this is the summary: stocks are currently surging because the Fed is “less confident it can normalize rates” and sees a “weaker global growth environment.”
What can one say: perfectly new normal.
Here is the full note:
Yellen Comments Emphasize Downside Risks
Bottom Line: Fed Chair Janet Yellen emphasized downside risks to the US economic outlook stemming from slower global growth in a dovish speech at the Economic Club of New York. Yellen highlighted the weaker global growth environment coupled with the FOMC’s “asymmetric” capacity to respond to economic shocks as the key reason for the Committee’s lower path for the funds rate in March. On inflation, Yellen acknowledged that that core inflation had risen “somewhat more” than she expected in December, but said it is “too early to tell if this recent faster pace will prove durable” and expressed concern about downside risks arising from lower inflation expectations.
Main Points:
1. In a speech to the Economic Club of New York, Fed Chair Janet Yellen took a positive view of recent US growth and employment gains, while emphasizing both current weakness in the US manufacturing and export sectors and downside risks to the outlook. In particular, Yellen expressed concern about the impact of the earlier tightening in financial conditions, slower growth globally and in China in particular, and uncertainty surrounding China’s exchange rate policy.
2. Yellen acknowledged that core inflation had risen “somewhat more than my expectation in December,” but said “it is too early to tell if this recent faster pace will prove durable,” in part because “earlier dollar appreciation is still expected to weigh on consumer prices in the coming months.”
3. Yellen expressed concern that “inflation expectations may have drifted down,” pointing to both the Michigan consumer survey and market-based measures of inflation compensation. Using the 1970s as an analogy, Yellen noted that stable inflation expectations cannot be taken for granted. However, she also noted that the Michigan measure has in the past responded to declines in gasoline prices and therefore might currently be “unreliable” as a guide to trend inflation. While Yellen said she views inflation expectations as still well anchored, if that view is wrong then “a more accommodative stance of monetary policy” might be required to return inflation to the target.
4. Yellen said that recent changes in economic conditions, especially developments abroad, “imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December.” Pushing back against the argument that the FOMC’s March projections for the funds rate represented a change in the reaction function, Yellen instead attributed the shift to the weaker pace of global growth. She emphasized the need to “proceed cautiously in adjusting policy,” noting that “caution is especially warranted” because the FOMC’s ability to respond to shocks with the funds rate close to zero is “asymmetric.”
5. Yellen noted that a number of Fed models imply that the real neutral rate is still close to zero. She attributed this in part to headwinds facing the economy, including weak foreign growth, the strong dollar, slow household formation, and weak productivity growth. While Yellen said she still expects these headwinds to “gradually fade” and for the neutral rate to rise as a result, she noted that “this assessment is only a forecast” because “no one can be certain about the pace at which economic headwinds will fade,” a somewhat less confident take on future neutral rate normalization.
6. Responding to concerns that central banks have run out of policy space, Yellen said that FOMC still has “considerable scope to provide additional accommodation” should it prove necessary. She also noted that the FOMC’s data-dependent approach “serves as an important ‘automatic stabilizer’ for the economy” because incoming data surprises tend to induce offsetting “changes in market expectations about the likely future path of policy.”
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Next, we await to see how long before Goldman finally throws in the towel on its “long dollar” trade.
Запись Goldman’s Take On Yellen’s Dovish Deluge: “A Less Confident Take On Rate Normalization” впервые появилась crude-oil.top.