Friday, December 18, 2015

Goldman Sachs on Fed Funds rate: "Fairly easy path to a second hike in March"

by Bill McBride on 12/18/2015 07:26:00 PM

A few excerpts from a research piece by Goldman Sachs economists David Mericle and Daan Struyven A Road Map to Hikes in March and Beyond

The FOMC raised its target range for the federal funds rate to 0.25-0.50% this week, shifting attention to the pace of subsequent hikes. While the median dot indicates a further 100bp increase in the funds rate in 2016, implying a second hike in March, the market is skeptical. ...

We see a fairly easy path to a second hike in March. We expect growth to remain above trend and employment gains to remain well above the "breakeven" rate. Most importantly, inflation is likely to rise by March as sharp declines in energy and health care prices drop out of the year-on-year calculation, supporting the Fed's expectation that inflation will pick up as transitory pressures fade.

... We find that ... the odds of a March hike are about 80% and the odds of four hikes by year-end are about 66%. 
Most analysts expect no change at the January FOMC meeting, but another rate hike in March seems likely.

Note that the effective funds rate was 0.37% yesterday (in the new range).