Wealth Club

The Federal Reserve may be less aggressive in raising interest rates next year, but US economic strength will give policymakers reason to stay the course in tightening monetary policy, according to Goldman Sachs.

The investment bank, one of the more hawkish on Wall Street, had been projecting a total of four rate rises in 2019 — even higher than the Fed’s own forecast to increase its benchmark short-term rate three times. Goldman Sachs now believes the chances that policymakers lift rates in March are “slightly below” 50 per cent. The pause would come at a time of heightened tariff uncertainty, given that a 90-day truce in the US-China trade spat ends March 1.

Still, the outcome of the Fed’s March meeting is a “close call” because there are “good arguments” for increasing rates, Goldman Sachs chief economist Jan Hatzius said. He noted that fiscal stimulus remains a key driver for the economy, while recent data such as job and wage gains in November were “hardly weak.”

Goldman Sachs sees the economy continuing to grow “above trend” for most of 2019, with wage and price inflation gradually accelerating and the unemployment rate falling further below the Fed’s long-term estimate. These factors will allow the Fed to restart quarterly rate rises beginning in June and lasting through the end of the year, Mr Hatzius said.

“Despite the change in our call on March, we disagree with current market pricing for the funds rate, which discounts less than one full hike in all of 2019,” he wrote in a note to clients.

Mr Hatzius added: “Current growth momentum is good . . . and the two key historical recession drivers — financial imbalances and a serious overheating problem — are still not visible. We therefore think that the storm will pass and this will keep Fed officials on a normalisation path, albeit a more tortuous one than up to now.”

Concerns over slowing economic growth and trade tensions between the US and China have pressured stocks in recent days. Market turmoil, combined with remarks by Fed chair Jay Powell that struck a dovish tone on Wall Street last month, have led investors to re-evaluate their expectations for what the central bank will do in December and next year.

The market sees a 33 per cent chance that 2019 will end with just one rate hike, according to the CME’s FedWatch Tool, which analyses contract prices for Fed fund futures.

As for next month, investors continue to expect the Fed to take action. FedWatch had 71.5 per cent odds for policymakers raising the fed funds rate to a target range of 2.25 per cent to 2.5 per cent. Mr Hatzius agreed that a December rate rise is likely, suggesting stronger odds of 90 per cent.