/Goldman Sachs sees a more hawkish stance from Jerome Powell after the Feds likely third rate cut this year

Goldman Sachs sees a more hawkish stance from Jerome Powell after the Feds likely third rate cut this year


FILE - In this June 19, 2019, file photo the Washington news conference of Federal Reserve Chair Jerome Powell appears on television screen on the trading floor of the New York Stock Exchange shows the rate decision of the Federal Reserve. The Fed concludes its two-day meeting Wednesday, Oct. 30. (AP Photo/Richard Drew, File)Associated Press

  • The Federal Reserve is expected to cut rates for a third time this year on Wednesday.
  • All eyes will be on Jerome Powell’s statements about the Fed’s future policy stance. 
  • Goldman Sachs expects that the Fed will become more “hawkish” on policy, posing a risk to bond yields and dollar weakness. 
  • “The FOMC has delivered a ‘dovish’ policy shock — meaning equities higher and yields lower—with declining frequency.”
  • View Business Insider’s homepage for more stories.

The Federal Reserve has cut rates twice this year already, and on Wednesday the central bank is expected to cut rates for the third time, by a quarter basis point. 

But Goldman Sachs says keep an eye on the language used by Jerome Powell, whom the bank says will probably shift to favor tighter policy going forward.

In a research note on Wednesday, the bank said that it expects the Fed to “make a somewhat hawkish change to the policy outlook section of the statement, by replacing the ‘act as appropriate to sustain the expansion’ language with a more two-way commitment to ‘act as needed to promote its objectives.'”

In financial terminology, a hawk wants higher interest rates to keep inflation at bay. A dove wants lower interest rates.

“Client feedback suggests some skepticism that the Fed will want to run the risk of delivering a hawkish message, especially when it is taking another step to ease the policy rate,” Goldman said. “There is some precedent to support that view. However, that pattern has not held true over the last 18 months.”

The bank said that historically “the Fed tends to ease financial conditions on decision days,” but this year that has not happened.

GSGoldman Sachs Investment Research

 

“While historically the S&P 500 tended to trade higher on FOMC days about 60% of the time, more recently that has only been true about a quarter of the time.”

“Taking this a step further, the FOMC has delivered a ‘dovish’ policy shock — meaning equities higher and yields lower—with declining frequency,” the bank said in its note.

The bank says hat this stance poses “a roadblock to further near-term dollar weakness and poses an upside risk to yields.”

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