Is the expectation of a 60% rate hike pure “self-indulgence”? Goldman Sachs spills cold water: the Fed's basic market is still on hold

The Zhitong Finance App noticed that Goldman Sachs is betting that Walsh's hawkish rhetoric will not be confirmed by hawkish data, so it still keeps the Federal Reserve on hold as its basic prediction.

Goldman Sachs chief economist Jan Hazius said that Kevin Walsh's speech at Jackson Hall was his most hawkish appearance since taking office as chairman of the Federal Reserve, but he believes that a change in tone alone is unlikely to be enough to trigger interest rate hikes next month.

In a report to clients, Hazius said that Walsh has clearly stated that his main concern is to ensure that underlying inflation falls clearly and fast enough to the Federal Reserve's 2% target, and warned that more work needs to be done if requirements are not met.

According to Hazius, Walsh also directly responded to a series of recent encouraging inflation data. While admitting that this summer's PCE and CPI data were better than expected, he argued that these data did not yet indicate a substantial improvement in the underlying price trend. Hatzius wrote that this statement opens the door to September rate hikes, but this will only happen if the upcoming August CPI and PPI reports exceed expectations.

Goldman Sachs's own predictions suggest that this threshold will not be broken. Hazius said the bank continues to expect core CPI and core PCE inflation to fall around 0.2% in August, and the agency believes this pace is insufficient to support the kind of policy response that Walsh's remarks suggest. Based on this, Goldman Sachs's basic prediction remains that the Federal Open Market Committee (FOMC) will keep interest rates unchanged at the September meeting.

If Hazius's prediction that the core CPI and PCE growth rate will fall around 0.2% in August is correct, it will generally be in line with recent trending inflation, rather than the kind of acceleration that Walsh signals to see. This may greatly disappoint traders who push the probability of interest rate hikes to nearly 60% based on that speech alone.

The report comes at a time when the market is re-evaluating the probability of action in September after Walsh's speech, and interest rate futures showed a sharp rise in the probability of interest rate hikes implied after his Jackson Hole speech. Goldman Sachs's analysis shows that unless the inflation data itself strengthens significantly in the next few weeks, this repricing may prove premature, making the release of the August CPI and PPI data a more decisive factor than just Walsh's statement on the September resolution.