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Goldman: 9 Rate Hikes Will Trigger Market Meltdown by 2019

Goldman: 9 Rate Hikes Will Trigger Market Meltdown by 2019

By    |   Monday, 25 September 2017 12:23 PM

Goldman Sachs calls for nearly two handfuls of interest-rate hikes by the end 2019.

The investment bank's economists Han Hatzius and David Mericle are quick to note the market only expects about two rate increases over that span, The Street.com reported.

"The September FOMC meeting had hawkish near-term implications, leading us to raise our subjective probability of a hike in December from 60% to 75%," the two economists said.

"Beyond this year, we expect that strong momentum in activity and employment growth, gradual upward pressure on inflation, and the limited impact of rate hikes on broader financial conditions so far will lead the Fed to continue on its current path of quarterly tightening through the end of 2019,” the two economists said.

“At first glance, our expectations appear dramatically more hawkish than market expectations, with our baseline of 9 hikes by end-2019 seemingly comparing with market pricing of just 2.5. But as Chair Yellen noted this week, such comparisons are problematic for two reasons,”  the two economists said.

“First, if risks are asymmetric to the downside, then a baseline forecast should exceed an average forecast. Second, most estimates of term premia are negative, even at the front end of the yield curve," the two economists said.

To be sure, the Federal Reserve is on track to gradually raise interest rates given the recent inflation weakness is fading and the U.S. economy’s fundamentals are sound, an influential Fed policymaker said on Monday, reinforcing the central bank’s confident tone.

New York Fed President William Dudley, among the first U.S. central bankers to speak publicly since a decision last week to hold rates steady for now, cited the soft dollar and strong overseas growth among the reasons he expects slightly above-average U.S. economic activity and a long-sought rise in wages, Reuters reported.

“With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the (Fed‘s) 2 percent objective over the medium term,” he told students and professors at Onondaga Community College.

“In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually,” added Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on monetary policy.

Dudley’s comments were similar to his speech earlier this month, and reinforced the growing expectation that the Fed is set to raise rates for a third time this year in December. That notion was driven home by Fed forecasts published last week, when the central bank held rates but announced the beginning of a long process of shedding bonds it accumulated to boost the economy.

(Newsmax wires services contributed to this report).

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Goldman Sachs calls for nearly two handfuls of interest-rate hikes by the end 2019.
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Monday, 25 September 2017 12:23 PM
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