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Goldman Sachs: Trigger May Be Required For QE Shift

FED
  • The new fwd guidance at the September FOMC was close to but a touch more dovish than Goldman's expectation (which expected max employment threshold + inflation at 2%, but not the "on track to exceed 2% for some time"). Also, GS had expected it to come at the Nov meeting because several FOMC presidents said they preferred to wait.
  • The lack of changes to the composition of Tsy purchases means that the FOMC does not currently plan to extend purchase duration, contrary to GS's previous expectation. Now, some additional trigger—such as a disorderly rise in yields at longer maturities or a deterioration of the economy—would likely be required, as the FOMC might have preferred to save duration extension as an option if the need arises.
  • GS sees asset purchases continuing at the current pace until roughly a year before liftoff in rates, which would allow for tapering and a pause thereafter before the first rate hike. But specifying economic criteria to be met one year before liftoff is difficult, so statement language on asset purchases didn't change.
  • The SEP hinted at a risk of an earlier liftoff than GS's early 2025 baseline, namely with 2023 showing unemp rate 4%, below 4.1% longer-run estimate, and inflation of 2% - a possible first hike in 2024.
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