First JPM, and now Goldman has fallen in line and following the unexpected reversal from WSJ Fed-whisperer, Nick Timiraos, the vampire squid not only also expects the Fed to hike 75bps on Wednesday, but warns that by doing so the Fed “risks” sparking a recession, which of course is not a risk but is precisely what the Fed is aiming at at this point because as we explained yesterday, the deterioration in the labor force absent a recession would be too slow to resolve the inflation problem in the near term.
Goldman’s Jan Hatzius, who hardly enjoys being upstaged by a Millennial Hilsenrath-wannabe reporter, first throws shade at Timiraos, saying that his report from earlier today, which we profiled previously, and according to which Fed officials are likely “to consider surprising markets with a larger-than-expected 0.75-percentage-point interest rate increase at their meeting this week” is a “departure” from another article that Timiraos published just yesterday that characterized such a move as “unlikely.”
As such, Goldman’s best guess is “that the article is a hint from the Fed leadership that a 75bp rate hike is coming at the June FOMC meeting on Wednesday.” In other words, this is just the latest confirmation of what everyone long suspected, that the WSJ is the Fed’s media conduit, just as Citadel is its markets conduit. It also confirms that the Fed really has no idea what it is doing, and is literally making up policy from one day to the next.
In any case, now that all this new Fed information has come to light, and which was likely prompted by “the upside surprise in the May CPI report and the further rise last Friday in the Michigan consumer survey’s measures of long-term inflation expectations that has likely been driven in large part by further increases in gas prices”, Goldman has joined JPM in immediately revising its forecast to include 75bp hikes in June and July. This would quickly reset the level of the funds rate at 2.25-2.5%, the FOMC’s median estimate of the neutral rate. Goldman then expects a 50bp hike in September and 25bp hikes in November and December, for an unchanged terminal rate of 3.25-3.5%. This is less relevant as by then the US will be in a deep recession.
Separately, Goldman is also revising its forecast of the dot plot, and now expects the median dot to show 3.25-3.5% at end-2022, and also expects the median dot to show two further hikes in 2023 to 3.75-4%, followed by one cut in 2024 to 3.5-3.75%. Again, what happens in 2024 and 2023 is irrelevant.
The last point is most important because it confirms what we have said since January: the Fed is hoping to push the US into a recession…
Goldman: "inflation risks—rather than improving growth expectations—have driven the recent hawkish pivot,"
Translation: the Fed is i) either hiking into a stagflation or ii) hiking with hopes of creating a recession
— zerohedge (@zerohedge) January 15, 2022
… something not even Goldman can deny any more, to wit:
Over the last month we have argued that market pricing was in roughly the right place in the sense that the drag from tighter financial conditions, in conjunction with the sizeable fiscal drag this year, puts the economy on the somewhat below-potential growth trajectory that we think is needed to rebalance supply and demand.
The additional tightening of financial conditions on Friday and Monday, driven by a rise in terminal rate expectations to about 4%, would imply a meaningful further drag on growth that goes somewhat beyond what we think policymakers intend at this point or should be targeting to have the best chance of bringing down inflation without a recession. That is the main reason we have a terminal rate forecast and a probability-weighted funds rate path that are below market pricing.
What does this mean for stocks? Luckily, another Goldman strategist, David Kostin, gave the answer over the weekend: