Tags: Goldman Sachs | Hatzius | Yellen | Fed

Goldman Sachs: Economic Recovery Boosts Chances of Rate Hikes

By    |   Wednesday, 27 May 2015 12:11 PM EDT

The U.S. economy is showing signs that it’s ready for the Federal Reserve to take the next step in getting monetary policy back to normal, according to Goldman Sachs Group Inc.

The bank studied drags on growth mentioned by Fed Chair Janet Yellen in recent speeches and found that the recovery from the Great Recession may be strong enough for a gradual hike in interest rates.

“Conditions have normalized considerably in recent years,” Jan Hatzius, chief economist at Goldman, said in a May 26 report obtained by Newsmax Finance. “As Yellen noted, if this process of normalization continues, then monetary policy is likely to normalize correspondingly.”

The Fed has held interest rates at record lows of near zero percent for more than six years as part of its efforts to help the economy rebound from its biggest decline since the Great Depression. The central bank is looking for signs that the jobs market is healthy and inflation is rising as consumer demand picks up.

Goldman looked at several “headwinds,” a sailing term that economists adopted to mean a drag on progress, cited by Yellen in her past two speeches: government spending constraints, decline in household net worth, tight lending standards, uncertainty and weak global growth.

Hatzius provided several conclusions in his report, co-authored by Goldman economist David Mericle:
  • Household Debt and Wealth. "Household debt levels remain on the high side but seem to have stabilized recently. While more households are likely debt-constrained today, net worth is close to historic highs, providing an offsetting boost to spending.
  • Lending Standards. "While mortgage lending standards remain very tight by historical standards, the Fed's Senior Loan Officer Opinion Survey has recently shown some easing on mortgage standards and shows that standards on non-mortgage loans are largely back to normal.
  • Uncertainty. "The economic policy uncertainty index developed by Bloom, Baker and Davis has risen a bit in recent months, but remains down substantially from crisis highs and is only moderately above the levels at earlier first hikes.
  • Fiscal Drag. "Fiscal drag has abated substantially over the last one to two years as the impact of tax hikes has dissipated and spending has picked up a bit. Nevertheless, the growth contribution from government spending remains on the soft side.
  • Global Growth. "Global growth also remains a bit soft but has improved somewhat in recent years. We expect trade to remain a drag on U.S. growth as a result of the strong dollar, though not to the extreme extent seen in the first quarter."

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The U.S. economy is showing signs that it's ready for the Federal Reserve to take the next step in getting monetary policy back to normal, according to Goldman Sachs Group Inc.
Goldman Sachs, Hatzius, Yellen, Fed
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2015-11-27
Wednesday, 27 May 2015 12:11 PM
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