Bond market’s Fed rate-rise forecast still ‘much too slow’, Goldman says

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The pace of Federal Reserve rate increases that fixed-income investors are currently expecting is still “much too slow”, with central bankers likely to fret about the unemployment rate falling too low even if inflation remains tepid, Goldman Sachs said on Monday.

“Even if core inflation remains below target for longer than anticipated, we think Fed officials would try to bring about a tightening in financial conditions in order to stop the downward trend in the unemployment rate before too long,” said Jan Hatzius, the investment bank’s chief US economist.

Mr Hatzius reckons the Fed will almost certainly increase its benchmark lending late in June following the rate rise in March. It is also likely to signal a third increase this year in its much-watched dot-plot forecast.

However, if incoming data between now and the mid-June meeting show strength in the economy, “a steepening in the 2018 median from the current three hikes is possible”.

That contrasts with bond markets, which are currently expecting a total of four total rate increases between now and the end of 2019, Mr Hatzius notes.

The remarks from Mr Hatzius come after data released on Friday showed the US jobless rate sliding in April to the lowest level in almost a decade, below levels that Goldman and many other economists see as “natural” in a properly functioning economy.

Despite the fast-tightening labour market, inflation and wage growth have been weak. Wages were growing an entire percentage point quicker on an annual basis in May 2007 — the last time the jobless rate was as low as it was in April. Meanwhile, the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, has consistently run below the central bank’s 2 per cent target (it sat at 1.6 per cent in March).

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