It’s all about the word ‘accommodative’ in the FOMC statement, according to Goldman Sachs.
Economists, there are in line with the consensus and expecting a 25 basis point hike to a range of 2.00%-2.25%.
“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 per cent inflation,” the statement currently says.
Goldman says the word accommodative is “a touch more likely than not to remain.” That follows a note in the FOMC Minutes that said removing the word would “at some point fairly soon” be appropriate.
The implication of leaving it in is that more hikes will be needed. So leaving in ‘accommodative’ will be bullish for the dollar and negative for risk assets.
The reason that GS believes it will stay is that forecasts for the neutral rate (r*) are now slightly higher than they believed in August, so even by hiking, policy will still be below neutral.
Goldman thinks it will ultimately be removed at the December meeting after a fourth hike this year. They don’t believe it should matter but say it will be a focus on investors.
Goldman Sachs economists expect no changes in the median path of the dot plot despite a slight bias higher. On the long-term dot plot, they see a shift in the longer-run or neutral rate dot appears likely to move up slightly to 3%
However, this will be the first meeting where the Fed extends the dot plot to 2021. Economists at Goldman believe the dot plot there will flatten out at 3.25-3.50%.
In terms of economic projections, they looked at the changes in economic data and note few shifts since the June FOMC. They believe 2018 GDP will be revised to 3.0% from 2.8% but the unemployment forecast inching to 3.7% from 3.6%. For 2019 and 2020 they don’t see any reason for changes.
For the initial 2021 estimate, they see 1.7%.