Goldman Sachs still sees Fed on hold despite Warsh's hawkish Jackson Hole tone
Goldman Sachs is maintaining a position that the Federal Reserve is unlikely to raise rates in September, countering market reactions to Kevin Warsh's hawkish remarks at Jackson Hole. Per the full note source, they believe that unless upcoming inflation metrics surprise to the upside, the expected core CPI and PCE readings of around 0.2% for August suggest a steady Fed is still in play. This stance may provide some relief to equity markets facing pressure from rising rate concerns, particularly if inflation data aligns with Goldman’s forecasts.
What the desk is arguing
Goldman Sachs argues that the bar for a September interest rate hike remains high, despite Kevin Warsh's notably hawkish rhetoric at Jackson Hole. Their economist Jan Hatzius contends that if inflation data, specifically the core CPI and PCE, print at around 0.2%, it will be consistent with recent trends that do not warrant urgency for further tightening. This interpretation allows Goldman to continue forecasting a Fed hold in September, as detailed in their recent analysis.
The desk leans on the prediction that upcoming releases of core CPI and PCE reflect moderate inflation momentum rather than the pressing need for increased rate hikes implied by Warsh's comments. The firm anticipates that these readings will not meet the heightened expectations set by the market, which recently pushed rate-hike odds to about 60% following Warsh's address.
This analysis counters the more bullish market sentiment that interprets Warsh's comments as a direct signal for a rate hike, suggesting that any sell-off pressures in equities should be closely monitored based on the forthcoming inflation data.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Goldman Sachs maintains a position against a September rate hike despite Kevin Warsh's hawkish comments.
- 02The firm predicts August core CPI and PCE inflation will print around 0.2%, aligning with their base case for a steady Fed.
- 03A soft inflation print could relieve some pressure from equities currently feeling the impact of rising rate concerns.
- 04Any significant upside surprise in inflation data could validate Warsh's hawkish stance and prompt a rethink of rate hike probabilities.
Market implications
Traders should keep an eye on the next core CPI and PCE releases, as these metrics will play a crucial role in shaping market expectations for Fed policy. A print above forecasts could prompt a recalibration of rate hike odds, impacting both FX and equity markets. Conversely, adherence to Goldman's forecast might lend support to current equity positions.
Risks to this view
Should core CPI or PCE data surprise to the upside beyond market expectations, it would likely validate Warsh's hawkish tone and increase the probability of a Fed hike, potentially reversing current market trends. Additionally, any significant changes in the macroeconomic landscape that suggest a stronger labor market or demand could also undermine Goldman’s outlook.
Goldman's read pushes back against the sharpest market reaction to Warsh's Jackson Hole remarks, arguing the bar for a September hike is higher than the initial spike in rate-hike odds implied. If Hatzius is right that core CPI and PCE will print around 0.2 percent for August, that would be broadly consistent with recent trend inflation rather than the acceleration Warsh signalled he needs to see, likely disappointing traders who had pushed hike odds toward 60 percent on the speech alone. A soft outcome on the upcoming CPI and PPI releases would probably see the front end of the Treasury curve retrace some of Friday's rise and could take pressure off equities that fell on rate concerns.
Conversely, any upside surprise in the inflation data would validate Warsh's framing and increase the odds markets already began pricing, making the next two data points unusually consequential for the September decision. --- Earlier: New week, catch up time! Warsh's hawkish Jackson Hole remarks lift rate hike odds, pressure stocks --- Goldman is betting Warsh's hawkish rhetoric won't be matched by hawkish data, keeping a Fed hold as its base case. Summary: Goldman Sachs chief economist Jan Hatzius describes Warsh's Jackson Hole remarks as his most hawkish as chairman, centred on getting underlying inflation back to the Fed's 2 percent target at sufficient speed.
Warsh acknowledged recent PCE and CPI readings were better than expected but argued they do not show a meaningful improvement in underlying inflation trends. Hatzius says the speech opens the door to a September hike if upcoming August CPI and PPI data come in firmer than expected. Goldman's own forecast is for core CPI and core PCE inflation to print around 0.2 percent in August.
On that basis, Goldman continues to expect the FOMC will hold rates steady at its September meeting. Goldman Sachs chief economist Jan Hatzius says Kevin Warsh's Jackson Hole address was his most hawkish appearance yet as Federal Reserve chairman, but argues the shift in tone is unlikely to be enough on its own to produce a rate hike next month. In a note to clients, Hatzius said Warsh had made clear his predominant concern is ensuring underlying inflation moves back toward the Fed's 2 percent target clearly and at sufficient speed, warning there is more work to do if it does not.
According to Hatzius, Warsh also addressed the recent run of encouraging inflation data directly, acknowledging that this summer's PCE and CPI readings had come in better than expected while arguing they do not yet indicate a meaningful improvement in underlying price trends. That framing, Hatzius wrote, leaves the door open to a September hike, but only if the upcoming August CPI and PPI reports surprise to the upside. Goldman's own forecast suggests that bar will not be cleared.
Hatzius said the bank continues to expect core CPI and core PCE inflation to print around 0.2 percent for August, a pace the firm views as insufficiently firm to justify the kind of policy response Warsh's remarks implied. On that basis, Goldman's base case remains that the Federal Open Market Committee will leave rates on hold at its September meeting. The note lands just as markets have been recalibrating the odds of a September move following Warsh's speech, with interest rate futures showing a jump in the implied probability of a hike after his Jackson Hole remarks.
Goldman's analysis suggests that repricing may prove premature unless the inflation data itself turns markedly firmer over the coming weeks, making the August CPI and PPI releases a more decisive input to the September decision than Warsh's rhetoric alone. This article was written by Eamonn Sheridan at investinglive.com.
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