Fed to pause this week because of bank stress: Goldman Sachs

Goldman Sachs Economist Predicts No Interest Rate Increase Due to Banking System Stress

A note published by Goldman Sachs economist, David Mericle, on Monday morning suggests that the Federal Reserve will not lift the interest rates at the upcoming meeting due to banking system stress. Mericle raised his concerns for the small and midsize banks that may not be awash with adequate finance to continue their lending requirements even with more common support in the form of policy.

Mericle’s comments come in the week of the Monetary Policy meeting of Federal Reserve. In a client note, Mericle outlined his assumption that despite the aggressive response from policymakers, markets are still unsure the efforts to aid small and midsize banks will prove sufficient. While Goldman Sachs has still predicted a quarter-point increase in May, June and July, he also stated that “the link between a single quarter-point hike and future inflation is ‘very tenuous.’ Moreover, the Fed can get back on track with hikes quite quickly.”

The growing concern over the banking industry’s health has been caused by the current economic climate in the USA. Federal Reserve Chairman, Jerome Powell, addressed Congress last week and warned of a “muted” outlook for the US economy. With trade tensions rife between the US and China, Powell emphasized that the most significant challenge facing the US economy is the risk of a significant downturn in the economic growth in the coming day.

The bond market also appears to be less than entirely convinced of the economy’s health. The prevalent indication has been a flattened curve in the Treasury yield curve. A curve which reflects Treasury yields by maturity that are not matching up as they traditionally tend to do. In recent weeks, two factors have challenged this yield curve. Firstly, the fact that the economic data released recently shows a slowdown in the US economy, and secondly, there is global economic uncertainty concerning trade and Brexit.

One issue that the Fed will need to consider will be the dilemma of balancing a growing US economy while also not raising the rates too high too soon, risking potential economic weakness. Mericle commented on this balance and referred to the “dual mandate of the Fed.” The employment and inflation indicators will be important in deciding policy going forward as increasing the rates too high too soon could lead to economic strains for small and midsize banks.

Mericle’s comments appeared in the form of notes to Goldman Sachs clients. In the latest publication, he explained that the financial markets’ weakened confidence has come to a point that even a small quarter-point hike could significantly impact the banking system. However, yet again, he reiterated that any action taken can be corrected with quick adjustments made by the Fed. Previous policymakers who have commented on the situation support that it is possible to adjust the rate policy easily.

While the US financial system has proven more capable of dealing with banking crises since the last global recession, there is still room left for concern over Midsize bank health, lower liquidity levels, and the pricing in the credit markets. As such the Federal Reserve is looking to balance their economic responsibilities with the potential risk of setting interest rates too high too soon.

In light of Mericle’s prediction, this week’s Monetary Policy meeting by the Federal Reserve will come under more focus with observers looking for any signals given by Powell’s team indicating the next potential hike in interest rates.


Related Posts