Goldman Sachs on Timing of Federal Reserve Tightening Process
June 16th, 2009 8:55 am | by John Jansen |Following the release of the “strong” (-345K strong?) labor report the futures market priced in Federal Reserve tightening by the end of this year. I do not think that will happen because I do not believe that the Federal Reserve will raise rates while the unemployment rate is rising. A reader forwarded to me a report which Goldman Sachs prepared on the topic. Here are the last two paragraphs of that report:
We draw three conclusions from this cyclical history: (1) In the last 50 years, the FOMC has never begun a clear and sustained tightening in monetary policy ahead of a cyclical peak in the jobless rate; (2) definitive shifts in policy have occurred only in response to the more definitive reversals in unemployment, and even in some of these situations the policy moves have been tentative and short-lived; and (3) the lag between the peak in the jobless rate and the first tightening in monetary policy has lengthened noticeably with the arrival of “jobless recoveries.”
In combination, these three conclusions then lead to a fourth: Those who expect the FOMC to start raising the funds rate in the near future (six months to a year) also expect either (1) a definitive peak in the jobless rate—i.e., a V-shaped recovery to take hold—during this period or (2) a break in FOMC behavior from a well-established tradition of waiting to see strong growth before they tighten monetary policy. The obvious case for the latter position is the abnormal policy tightening that has been implemented in this cycle, both in terms of the funds rate and unconventional measures. Although Fed officials could end up justifying an earlier tightening on these grounds, the message currently coming out of the central bank seems to be that it is premature to expect this. And, if the recovery is as sluggish as we think it will be, worries about a renewed downturn will overcome temptations to take away monetary stimulus from an economy that is struggling..
