Goldman Sachs economists stepped back from their bold call for a Fed rate hike this month after a surprisingly weak report on the service sector and a lack of clear signals from Fed officials.
The economists lowered the odds Wednesday morning for a September rate hike to 40 percent. On Friday, they gave 55 percent odds even after the tepid August jobs report convinced many that the Fed was not likely to move soon.
Goldman Sachs economists had said they believed Fed officials were intentionally sending a strong signal about raising interest rates in September during their recent meeting at Jackson Hole, Wyoming.
Goldman viewed the jobs report as a close call but just strong enough for the Fed to move — until the August ISM nonmanufacturing data Tuesday fell sharply to 51.4, a level last seen in 2010.
Over the weekend, Goldman economists said in a note that the next metric they would be watching are the words of Fed speakers themselves.
San Francisco Fed President John Williams was the first to speak, at an event in Nevada on Tuesday night. He repeated his call for gradual interest rate hikes. Two other Fed presidents — Richmond Fed President Jeffrey Lacker and Kansas City Fed President Esther George — give testimony about on Capitol Hill on Wednesday.
"San Francisco John Williams advocated for raising rates 'sooner rather than later,'" the economists wrote in a note Wednesday. But Williams "did not stress the need to hike at the September FOMC meeting specifically," they wrote.
Goldman Sachs Chief Economist Jan Hatzius and his team had disputed the view by many that the Fed would be tentative about hiking in September because of the U.S. presidential election, since there is a precedent of Fed actions before elections in the Greenspan and Bernanke eras.
After Friday's jobs report, the market odds for a September rate hike fell to about 1 in 3, and after the ISM data it was even lower at 1 in 4. The disappointing 151,000 nonfarm payrolls for August was about 30,000 below expectations and not seen as strong enough to force the Fed's hand.
But Goldman economists had said Fed Chair Janet Yellen set a low bar for the jobs report in her Jackson Hold speech on Aug. 26. She specifically said given the "continued solid performance of the labor market and our outlook for economic activity and inflation" that she believed the case for increasing the federal funds rate "strengthened in recent months."