Americans squeezed by uncomfortably high borrowing costs may be nearing the end of the Fed’s latest tightening efforts, but that doesn’t necessarily mean mortgage or other long-term interest rates will fall quickly.
Goldman Sachs chief economist Jan Hatzius currently expects the Fed to raise interest rates by only another 25 basis points in December, and said this move may disappear if inflation continues to cool.
The change comes after the Federal Reserve raised its benchmark range to 3.75%-4.00%its latest attempt to bring inflation back to 2%.
Since then, the case for aggressive austerity has weakened.
Only new employers 29,000 new jobs added in Septemberwhile the unemployment rate edged up to 4.2%, according to the Bureau of Labor Statistics, and underlying monthly inflation data showed weakness.
Hatzius believes the market is pricing in too much additional tightening. However, this raises the question of whether December will bring the final rate hike, or whether September’s hike will ultimately prove to be a rare “one and done” move.
Why Goldman Sachs thinks the Fed can stop action sooner than the market expects
With the economy now sending a very different signal to the Fed, the case for extending the rate hike cycle has quickly weakened.
That’s important for borrowers, businesses and investors because additional rate hikes would add pressure to an economy already facing expensive credit and a markedly weak labor market.
The most obvious change is recruiting.
Employer just added 29,000 new jobs added in SeptemberAccording to the Financial Times, employment numbers for July and August were revised down by a total of 60,000 people, well below expectations of about 90,000. The unemployment rate also rose to 4.2%According to NBC News, average hourly earnings increased just 0.1% this month, suggesting wage pressures are no longer increasing at the pace policymakers feared.
Inflation remains above target, but the monthly trend is less threatening.
Reuters reports core personal consumption expenditures (PCE) rose in August Increased 0.2% from the previous monthalthough the overall PCE is still 3.4% higher than the same period last year.
Hatzius believes that if the monthly pace continues, the need for further austerity may be completely eliminated.
In an interview with CNBC, he said in an unusually direct manner, “I think the market is still underestimating the possibility of three rate hikes, and I don’t think it’s necessary.”
Financial conditions are also part of the Fed’s job.
The 10-year Treasury bond yield recently reached about 5.34%According to NBC News, mortgage rates have climbed above 7%, a 24-year high. This means that even if the Fed takes no further action, households and businesses are already facing tighter financing problems.
Together, these signals explain why Goldman Sachs sees diminishing returns from more rate hikes. The next question is whether other major banks and the Fed itself are prepared to reach the same conclusion.
Andrew Harnick/Getty Images
Wall Street is moving closer to Goldman Sachs’ rate path
Goldman’s forecast is best described as a bet that the current tightening cycle will be much shorter than the more hawkish scenarios still being discussed.
More from the Fed:
- JPMorgan drops Fed rate bombshell on Warsh and inflation
- Fed rate decision shakes Wall Street’s inflation fears
- Bank of America says today’s Fed rate hike will be official
JPMorgan has been close to Hatzius, predicting the Fed will raise interest rates again before stopping in December, and the Fed’s own September median pointed to about 25 basis points of additional hikes this year.
Even more divisive is the fact that businesses still expect more tightening.
Morgan Stanley expects rate hike December 2026 and March 2027set the target range to 4.25%-4.50%. Ahead of the latest jobs report, Bank of America was more aggressive, predicting rate hikes in both sectors. October and December.
Earlier this week, the implied odds of a rate hike in October had risen to 70%According to Tradingpedia. After weak data and more cautious comments from the Fed, the likelihood dropped to about 13.8% This follows Friday’s employment report, reported by Invezz.
This has the market increasingly focused on a pause in October, followed by a trend in December.
The bigger open question is whether another run of weak inflation data will further boost expectations and lead to no more rate hikes at all.
Fed may be nearing end, but bailouts may take longer
The next test came soon.
this October 14th CPI report It may determine whether September’s interest rate hike will be the start of a new tightening cycle, or whether it will be closer to a one-off move.
Hatzius said another weak inflation reading would be consistent with the Fed skipping a rate hike in October, while continued monthly inflation data around 0.2% could also cause policymakers to abandon a rate hike in December.
That would make Goldman’s forecast more dovish than the current base case of one rate hike.
But for households, the end of the Fed’s tightening policy won’t automatically translate into cheaper borrowing. Hatzius more confident market is overpriced Short-term interest rates rise He believes long-term yields will fall rapidly.
Even if the Fed stops raising interest rates, Treasury supply and other forces could keep yields high. Additionally, mortgage rates are more closely related to long-term bond yields than to the federal funds rate itself.
So the next phase of the story isn’t just about whether the Fed raises rates again. The question is whether inflation cools enough to end tightening and whether financial markets finally get the rate cut consumers have been waiting for.
RELATED: Bank of America’s $5,000 Gold Price Forecast Comes with a Warning