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Goldman sees rate hike odds rise as Trump slides in polls

Donald Trump
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Donald Trump

Goldman Sachs economists now see a 75 percent chance of a Fed rate hike by the end of the year, with odds rising as Republican Donald Trump's chances of winning the White House have fallen.

In a note, the economists point to a swing in the election outcome toward Democrat Hillary Clinton as well as better economic growth as reasons for raising the odds from 65 percent. According to their "subjective probability," the chances for a November rate rise are 10 percent and for a December hike are 65 percent.

They point to betting markets and poll aggregators, which show the probability of a Trump win falling to 10-20 percent, down from 30-35 percent two weeks ago.

"This is important because market participants seem to view a Trump victory as a potential trigger for a significant tightening in financial conditions, which in turn could result in another delay for the FOMC," they wrote.

The economists say the concerns about a sharp growth slowdown have eased, with third-quarter GDP tracking at 2.7 percent. As for the squishy September jobs report, the economists say the "continued sideways move in unemployment suggests that there is more labor market slack than most expected at the start of the year."

Even though the unemployment rate rose slightly to 5 percent, the job growth rate of 156,000 was well above a breakeven rate of 85,000. There are also consumer and business surveys that show the availability of qualified workers is close to levels that suggest the labor market could start overheating.

They also note that wage growth is short of expectations, but core PCE inflation has edged up to 1.7 percent, closer to the Fed's 2 percent target. They expect the 2 percent target to be reached by late 2017 or early 2018.

Goldman Sachs economists also project the economy to pick up from this year's slow pace, based on a positive shift in financial conditions.