Saturday, December 12, 2015

Goldman: FOMC Preview

by Bill McBride on 12/12/2015 05:41:00 PM

A few excepts from a research piece by Goldman Sachs economists Zach Pandl and Jan Hatzius: December FOMC Preview

Next week we expect the FOMC to raise its target range for the federal funds rate to 0.25-0.50%, bringing an end to the seven-year period of near-zero interest rates. With this action essentially priced in, focus will be on the committee’s policy guidance for 2016 and beyond.

If the FOMC raises rates next week the post-meeting statement will require a thorough rewrite. We expect three main changes. First, we expect the committee to upgrade its description of the labor market in light of firmer payroll growth. Second, we expect the statement to remove some of its relatively cautious language on inflation, while continuing to emphasize that inflation will remain a key determinant of the policy outlook. Third, we look for the statement to show a clear baseline for additional rate hikes—it will not signal “one and done”.

Although Fed officials regularly describe the likely pace of rate hikes as “gradual” we do not expect this term to appear in the statement itself. Recent comments suggest some hesitation about adopting “gradual” as official guidance, despite the frequent mentions. That being said, from the press conference guidance and the Summary of Economic Projections (SEP), the gradual message should be all but explicit.