VIEW: Goldman Adjust Fed View, Peak In Line With SEP

Goldman Sachs note that “the FOMC’s revised projections provided the key takeaways from the September meeting. We had expected a nod toward a slower pace in November and are revising our forecast for rate hikes to 75bp in November, 50bp in December, and 25bp in February, for a peak funds rate of 4.5-4.75% (vs. 4-4.25% previously).”

• “The path of the funds rate in 2023 will depend mainly on two issues. The first is how quickly growth, hiring and inflation slow. While there are risks in both directions, we see more risk that a higher peak rate will be needed to reverse overheating than that the Fed will stop earlier. The second is whether FOMC participants will really be satisfied with a sufficiently high level of the funds rate and willing to slow or stop tightening while inflation is still uncomfortably high. While the goalposts shifted today, this appeared to be a one-time adjustment as participants raised their estimate of the short-run nominal neutral rate to reflect the high inflation environment.
• “The dot plot also showed a median projection of 175bp of total rate cuts in 2024 and 2025. We would not put much weight on this. In our view, if rate hikes solve the inflation problem without a recession, the FOMC would most likely wait until something goes wrong to cut rather than cutting just for the sake of returning to neutral. That said, the higher the funds rate goes, the more likely it is that some easing will be needed to prevent a slowdown from going too far.”