Tension is super high on Fed day (see all updates) but the team at Goldman Sachs offers a positive message.
Here are scenarios from the team at GS:
Here is their view, courtesy of eFXnews:
On the spectrum for lift-off, GS thinks a more hawkish “hike it and like it” is better for risk, and the Dollar, than something more dovish, like “one and done.” That is, according to GS, because markets have recently looked to the Fed for leadership during heightened uncertainty, like in September when a dovish Fed caused risk to sell off, while a hawkish FOMC statement in October caused risk to rally.
“The best approach, in our opinion, is to “hike and like,” which is close to our US team’s forecast that “gradual” does not make it into the statement and the 2016 median dot is unchanged, admittedly a close call.The market will take such a message as growth positive (the US economy is strong enough to support a series of hikes) and will be relieved not to have to worry over the Fed’s reaction function. Risk will bounce, so that financial conditions – even with USD up versus G10 – could ease. Should the Dollar rally too much, there is a built-in circuit breaker: Dollar strength is a deflationary impulse that will slow the pace of Fed hikes down the road.
Better to now “hike and like” and rely on this transmission channel, rather than unsettle markets with an implicit focus on financial conditions, causing a “risk-off” with renewed worries over the Fed’s reaction function,” GS argues.
“In our base case – the “hike and like” scenario – the Dollar could rally between one and two percent against the majors, while equity markets should also rally.In contrast, a cautious message could rattle markets, causing EM to weaken and risk to sell off,” GS concludes.
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