VIEW: Goldman Sachs: Fed Liftoff Pricing Finds A Sticking Point

Goldman Sachs note that "the pulling forward of Fed hike pricing in the early part of this year largely tracked the market's improving optimism on the inflation trajectory. Since early March, however, the timing of liftoff implied in markets has proved somewhat sticky around early 2023 despite further firming of front-end inflation over that period. We have noted in the past that the likely policy sequencing where the Fed fully tapers asset purchases ahead of raising rates should provide somewhat of a soft inner bound on liftoff pricing, and recent movements in front-end inflation and nominal rates suggest that the market seems to have found that point around Q1 2023. While we are reluctant to view current levels as a hard bound (market liftoff pricing shifted briefly towards late 2022 following the March payrolls report), there appears to be a good case for some asymmetry on the outlook for real rates vis-à-vis inflation - further inflation upside may not pull liftoff forward hikes by all that much, but a softer outlook could see the timeline shift further out. That is not to say that the front-end of the curve is immune to even more bullishness on inflation, but we think that this would likely have a greater impact on the pace of hiking beyond liftoff rather than pulling forward the liftoff date by much."