Goldman: Federal Reserve will only hike 3 times this year

Goldman: Fed to hike rates 3 times this year
Goldman: Fed to hike rates 3 times this year   

The Federal Reserve is likely to only increase interest rates three times this year, skipping a hike at its March meeting, Goldman Sachs said, revising its previous forecast for four hikes.

Goldman believes that the Fed may not hike until June although it noted that rates could still be lifted in April if market conditions improve significantly.

"Incoming economic data continue to look broadly consistent with the committee's outlook, but financial conditions have tightened meaningfully," Goldman said in a note Wednesday. "Officials sound inclined to take more time to gather data and observe market developments."

But it noted that its forecast for three hikes is still above markets' pricing for just a 50 percent chance of a Fed hike this year and a 25 percent chance of a rate cut.

Goldman said its Financial Conditions Index (FCI) had tightened about 50 basis points since the December Federal Open Market Committee (FOMC) meeting, which implies a 40 basis point hit to economic growth.

"Recent comments suggest that policymakers see the tightening in financial conditions as excessive, with potential implications for growth and the path for policy later this year," Goldman said.

That's broadly in line with comments from New York Fed President Bill Dudley Wednesday, who told Market News International that financial conditions are "considerably tighter" than they were when the December meeting took place. Fed Vice Chair Stanley Fischer said earlier this week that the central bank is unsure of how many times it'll raise interest rates this year.

The Fed also fueled market expectations that its previously stated goal of about four interest rate hikes this year wasn't likely to come to fruition, with its post-meeting statement released in late January.

As widely expected, the central bank left rates unchanged but said it was "closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."

Markets read the Fed's cautious tone on the economy and financial conditions as a sign it is not likely to hike rates in March.

The economy itself may not provide a clear-cut picture for Fed watchers.

Activity seems to suggest modest expansion, Goldman said, but it noted that some data are signaling a slowdown early in the year.

It cited the ISM non-manufacturing index for January, which provides a reading on the services sector. The index fell to 53.5 in January, from 55.8 in December, below expectations of 55.1 from a Reuters poll. A reading above 50 indicates expansion.

That followed the ISM index for the manufacturing sector falling for a fourth straight month, with factory activity index rising to 48.2 from 48.0 in December.

"Risks are tilted to the downside—it is still easier to see the committee slowing down the rate of increases then speeding them up," Goldman said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1