Will the FOMC deliver more than two hikes in 2016? – Goldman Sachs

By FXStreet FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that the FOMC is sometimes criticized for using too much discretion, but in many respects the committee’s policy decisions in recent years can be understood in the context of a Taylor-like rule.

Key Quotes

“Looking ahead, a standard policy rule coupled with the Fed’s economic projections (or our own) calls for a roughly 125bp increase in the funds rate by end-2016. While the FOMC’s preference for a “gradual” path of hikes suggests that four is most likely, the economic case for the full 100bp implied by the Summary of Economic Projections (SEP) is strong.

Importantly, a faster pace of rate increases than the roughly two hikes priced in to the bond market does not require a major rebound in the equilibrium real rate, or r* (“r star”). Our forecasts for core inflation and the U6 unemployment rate would warrant more than 1pp of rate increases next year, even with r* still at zero. The gradual increase in r* expected by most forecasters would argue for a quicker pace—and a much higher terminal rate. Stated differently, in a Taylor Rule context, market pricing suggests much greater investor skepticism about a rebound in core inflation …read more

Source:: FX Street