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Goldman sees 'close call' on Fed rate hike timing

The Federal Reserve building in Washington.
Gary Cameron | Reuters
The Federal Reserve building in Washington.

Goldman Sachs economists say it is now a close call on whether the Federal Reserve raises rates for the first time in September, as the firm had forecast, or in December.

In a note Tuesday, the economists said their reasons are more about the lack of inflation than the weakness of the first-quarter data and the sluggish rate of job growth, with just 126,000 nonfarm payrolls in March.

"The wage weakness is one reason why we find it difficult to be 'reasonably confident' that inflation will return to 2 percent over the medium term. Other reasons are the low starting point for the core (consumer price index and personal consumption expenditures) measures, the inherent unpredictability of inflation, and the possibility of a further substantial appreciation in the U.S. dollar," they wrote.

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In that type of environment, Goldman economists said "optimal monetary policy" would put the Fed's plan to hike rates this year on hold until there is evidence of how inflation will return to the 2 percent level.

"And while our central forecast of actual policy remains lift off at the September 16-17 (Federal Open Market Committee) meeting, this is now a close call vs. December," they wrote.

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Goldman said first-quarter growth now looks to be about 1.1 percent, which would be similar to the same period of 2014, when cold weather impacted the economy. The economists expect a spring back in the next quarter or two, and see upside risks to their second-quarter growth forecast of 3 percent.

They also say a weak jobs report was not unexpected, given the strong string of reports in recent months. Job growth now averages 197,000 over the past three months, even with revisions.

"The more important message from the jobs numbers remain that the U.S. labor market is moving only gradually toward full employment. The broad underemployment rate U6 edged down to 10.9 percent in March and remains on track for a return to our 9 percent estimate of its equilibrium level by mid-2016," they wrote, referring to a measure that incorporates those who have quit working or are employed part-time for economic reasons.