That will be after what promises to be a contentious presidential election between a Democratic challenger and President Donald Trump, who has been a fierce Fed critic and a week ago called for rate cuts and more quantitative easing.
“The Fed has increasingly been placed in a political spotlight,” Hatzius and his colleagues wrote. “Greater political scrutiny of monetary policy decisions probably further reduces the odds of a rate hike in a presidential election year until after the elections are over.”
Goldman also expects to see another increase coming in 2021.
There are other reasons that Goldman cites for a likely pause in the meantime, paramount among them being an economy that is performing better than expected so far this year, blunting the need for a cut, and inflation that has remained tame, negating the need for more tightening.
In fact, Goldman also has increased its projection for second-half GDP growth to 2.5% from 2.2%, and taken up its numbers for the first half of 2020 to 2.25% and to 2% for the second half of 2020 and first half of 2021. The firm had expected 2019 to hover around 2% and the ensuing two years to be around 1.5%.
“The downside risks that clouded the outlook at the start of this year have abated as growth momentum has picked up and the Fed’s pivot has reversed much of the earlier tightening in financial conditions,” Hatzius wrote. “While hikes have become less likely in the near term, we continue to think that the next move is much more likely to be a hike than a cut.”
Futures market pricing views things differently.
While traders have been shifting to a less dovish mentality, they still anticipate a 42% chance of a rate cut before the end of the year. Pricing further out suggests a longer-term funds rate around 1.95% by mid-2021, suggesting two cuts from the current target range of 2.25% to 2.5%.
White House economic advisor Larry Kudlow said Thursday that rates “may never rise again in my lifetime.” Former Fed Chairman Alan Greenspan, when told of the Kudlow statement during a CNBC interview Friday, laughed and said, “Say that again. … Don’t hold your breath on that one.”
Goldman’s economists figure that financial conditions will continue to ease, though not enough to boost inflation and give the Fed incentive to raise rates soon. However, they say “a very gradual pace of tightening” beginning after the election.