Goldman Sachs has apparently decided to be very Keynesian about whether the Federal Reserve is about to raise interest rates or not. Difficult to fault them for this really, Keynes was after all a very good economist as well as something of a wise man. However, it's not the economics part they're following here it's the wise part. That is, they've changed their minds. Just last week Goldman Sachs was predicting that September 21 st would be when the Federal Reserve raises rates:
On September 21, the Fed is gonna do it. They’re gonna hike rates, say a few bold economists.
The US economy is adding jobs at a rate that’s “just enough” for most members of the Fed’s Federal Open Market Committee (FOMC) to vote for a rate hike this month, Goldman Sachs’ Jan Hatzius argued.
And he was pretty but not perfectly certain about this:
Goldman Sachs chief economist Jan Hatzius is one of the few in the camp that September is more likley. He said Friday a September hike is a close call but it's more likely than a December one, based on the recent Fed comments. He said the probability is 55 percent for September and 80 percent that the Fed hikes this year.
Which brings us to today. That prediction is now inoperative:
Goldman Sachs economists stepped back from their bold call for a Fed rate hike this month after a surprisingly weak report on the service sector and a lack of clear signals from Fed officials.
The economists lowered the odds Wednesday morning for a September rate hike to 40 percent. On Friday, they gave 55 percent odds even after the tepid August jobs report convinced many that the Fed was not likely to move soon.
That weak services report is here.
The real information to take away from this though is that above 50 means growth is continuing, below that the sector is actually shrinking. And since services are some 80% odd of the American economy we’re really quite happy that the sector is still growing. We’re rather less happy that it is growing more slowly than before. It’s a so/so result, and as such is most unlikely to tip anyones’ decision about anything at all one way or the other. If it had come in at 20 (about equivalent with the warning signs of a major depression) then the Fed will not be raising interest rates later this month. At 80, indicating a galloping expansion akin to the regrowth after a plague or major war, they would. Bumbling around in the low 50s?
At Goldman Sachs that was enough to change their probabilities but not enough to swing the call entirely one way or the other.
Which brings us to being like Keynes. Yes, of course Keynes was a monetary economist that's actually how he made his bones. All of this stuff about fiscal policy is only there for when monetary policy no longer works. However, that's not what has me likening GS to him. Rather, he famously once said "When the facts change I change my mind. What do you do Sir?" And given that the state of our knowledge of the economy has changed, marginally, it does seem sensible to change views about the actions that will be taken to manage the economy. Marginally. Which is what Goldmans have done.
