Goldman Sachs said the Federal Reserve should hold off on raising interest rates because inflation won’t reach the central bank’s target in the next three years. Disappointing job growth is less of a concern, according to the New York-based investment bank.
We “do not have much confidence in the inflation outlook and believe that the right policy would be to put hikes on hold for now,” said Jan Hatzius, head economist at Goldman. The jobs market “strikes us as a manageable hurdle.”
U.S. companies added 126,000 employees in March, the weakest growth since December 2013, according to a Labor Department report on Friday. Prior to the report, Wall Street economists had estimated 274,000 jobs would be added.
Hatzius said bad weather likely weighed on job growth, which may bounce back in coming months. The bigger concern is the inflation outlook, he said in an April 2 report
obtained by Newsmax Finance.
“Being ‘reasonably confident’ in inflation returning to the 2 percent target is a tall order,” Hatzius said, referring to the Federal Open Market Committee’s March 18 policy statement
that outlined the economic criteria to raise interest rates.
The FOMC estimates inflation, as measured by the personal consumption expenditures price index excluding food and energy, will rise from about 1.4 percent currently to 1.7 percent by the end of this year and 1.9 percent by the end of 2017.
“That is, the FOMC expects that core PCE inflation will fall short of the 2 percent target for at least another two and a half years,” Hatzius said. He forecasts that the Fed will begin raising rates in September.
The Federal Reserve Bank of San Francisco said inflation estimates “remain well anchored” among professional forecasters responding to a survey, according to an April 6 report
posted on its website.
“Median long-term inflation expectations from the Survey of Professional Forecasters have come down a bit since the Great Recession and are now close to their levels from the first quarter of 2007, near the Fed’s 2 percent objective,” according to Fernanda Nechio, an economist at the bank. “This decline appears to be primarily driven by revised expectations from specific forecasters who had overestimated long-term inflation in the aftermath of the crisis.”
The Fed’s response to the financial crisis with rate cuts and unconventional stimulus measures such as quantitative easing may have caused forecasters to expect higher inflation, she said.
“The novelty of some of these policies may have contributed to uncertainty about their effects and therefore affected some forecasters’ estimates,” Nechio said. “The decline in both median forecasts and cross-sectional forecast dispersion back to 2007 levels and closer to the Fed’s objective suggests that inflation uncertainty has receded and that expectations, at least among professional forecasters, remain well anchored.”
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