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Fed Action Likely but Jury Still Out on What Kind: Hatzius

The minutes from Federal Reserve’s July policy meeting suggest more action is likely in the coming months, Goldman Sachs economist Jan Hatzius told CNBC’s “Squawk Box” on Thursday.

The Federal Reserve headquarters in Washington, DC.
The Federal Reserve headquarters in Washington, DC.

Hatzius, however, only puts the odds of additional monetary stimulus, or quantitative easing (explain this), at 30 or 40 percent. Instead, the economist expects "an extension of the guidance, maybe even a reformulation" of the language that led the Fed to promise low rates for at least two more years.

“I think there’s a strong possibility of QE at the September meeting, but my guess would be that it’s going to be a little later, but certainly possible,” he said. Much will depend on the upcoming economic data including the August payroll numbers. (Read More: More Easing Not Needed If Growth Holds Up: Fed's Bullard).

If more easing is forthcoming, Hatzius said the Fed (explain this) could adopt a more open-ended approach. “There is a lot of justification for thinking about sort of flow rate and open-ended QE,” he said. That would mean that the Fed could start buying securities, continuing to do so until growth forecasts no longer fall short of estimates.

Investors looking for hints about Fed policy at the upcoming Jackson Hole, Wyo., central bank meeting may come away disappointed. Hatzius noted that Bernanke has not always telegraphed action in these speeches.

Goldman Sachs expects the economy to grow at a modest 2 percent, with the impact of additional Fed stimulus included in the numbers. Taking out Fed stimulus, Hatzius said would shave a couple of tenths off the growth rate. (Related: Fiscal Cliff Will Cause Recession, CBO Warns).

“The reason why we're not growing faster than 2%, in my view, is still mainly a lack of aggregate demand,” Hatzius said.

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