Goldman Sachs Sees Fed Resuming Easing

Goldman Sachs on Wednesday reviewed its position on further monetary stimulus, saying that further quantitative easing had a greater than ever chance of being implemented in the United States.

The Federal Reserve headquarters in Washington, DC.

"We now see a greater chance that the FOMC (Federal Open Market Committee) will resume quantitative easing later this year or in early 2012.

We've changed our call because the committee's reaction to incoming economic data is more dovish than previously thought," Jan Hatzius, chief U.S. economist Goldman Sachs said in a note.

Fed officials met on Tuesday and said they still expected a gradual decline in the unemployment rate but conceded that they may keep the funds rate unchanged, implying they would employ additional policy tools in case of further economic deterioration.

"The policy commitment to keep the funds rate at 'exceptionally low levels…at least through mid-2013' was more aggressive than we had anticipated. We are surprised that there is a date, even more that it is almost two years in the future," he said.

He added that the Fed had been explicit, more so than anticipated, about preparing to use "these tools"—the same language used in September 2010 which paved the way for the last round of quantitative easing (QE).

"The implication is that the committee would probably ease policy further if its economic forecast converged to our own, more downbeat view. Our own modal forecast is a flat-to-higher rate through the end of 2012," Hatzius said.

"We see a recession risk of about one in three and if that were to happen the committee would of course ease further. The most likely route to be deployed initially by the Fed would be 'conventional' QE but it could be even more aggressive such as rate caps or interventions in non-government securities market," Hatzius said.

Although more QE was now Goldman's base case there was a possibility that it might not occur if the economy turned out stronger than forecast and if inflation posed a higher hurdle to further stimulus.

"Also the anti-Fed backlash late last year might argue against further QE but the policy could be tweaked so instead of a large-and-scary upfront number they might choose to specify a smaller monthly flow of purchases," he added.