Goldman Says Growth Is Bigger Fed-Hike Factor Than Market Thinks

Investors have been underestimating the importance of U.S. economic growth for Federal Reserve policy, and giving too much relative emphasis to inflation and wage data that have tended to disappoint expectations, according to Goldman Sachs Group Inc.

If it starts looking more likely that U.S. growth will stay above its potential rate, that could boost the chances of a labor-market overheating that quickens the pace of Fed rate increases, Goldman economists led by Jan Hatzius wrote in a Dec. 17 note.

“While we believe the heightened market focus on price and wage data is indeed warranted, we think the market may be under-appreciating the importance of growth indicators for the monetary policy outlook,” the Goldman analysts wrote. “The Fed does not require rising or above-target inflation to tighten policy on a quarterly basis, so long as the broader economic outlook remains consistent with a return to target.”

Goldman has forecast the Fed to raise rates four times next year, while Fed officials in their Dec. 13 policy announcement stuck with a prediction of three.

Source: Bloomberg