About a month ago, when the market was transfixed with how the worst banking crisis since Lehman was going to impact the Fed's hiking plans, Goldman emerged as one of the more dovish voices predicting that Powell would not hike at the March 22 FOMC decision and would instead pause to see what the fallout from the banking crisis is. And while Goldman was wrong, and the Fed did in fact hike a dovish 25bps, it's not because their logic was wrong: after all, while the Fed was tightening monetary policy with one hand, it was also easing with the other by injecting a total of $400 billion in "emergency" reserves (the Fed claims that these interventions are temporary but as we explained over the weekend, unless deposit flight reverses, the Fed will have to step in with permanent liquidity injetions, i.e., a new round of QE).
So fast forward to today when following the somewhat weaker than expected CPI report, Goldman has again changed its Fed call in a dovish way, and as its chief economist Jan Hatzius writes, "we are changing our Fed call to remove the hike we had previously expected in June. We continue to expect a hike in May, which would raise the target range to 5-5.25%."
Translation: one and done.
Here are some more excerpts from the note available to pro subs in the usual place, first the bank's reaction to the CPI report
March core CPI rose 0.385% (mom sa), a touch below consensus of 0.4% and compared to the three-month average of 0.38%. The year-on-year rate rebounded a tenth to 5.6% as expected. The most important aspect of the report was the sharp stepdown in shelter categories (rent +0.49% vs. +0.76% in February, OER +0.48% vs. +0.70%), which we believe reflects a waning boost from existing tenant rents resetting higher post-pandemic, as well as the long-anticipated impact of slowing new tenant rental pricing. Core services prices excluding rent and OER rose a solid 0.40% on strength in categories with pent-up price pressures like car insurance (+1.2%) and daycare (+1.4%). Travel categories were stronger than we expected (airfares +4.0%, lodging +2.7%) and could retrench a bit in April. Auto prices were soft on net, with new car prices rising 0.4% and used car prices falling 0.9%, though the sharp rise in used car auction prices argues for at least some rebound in Q2. Headline CPI rose 0.05%, as energy prices fell 3.5% and food prices were unchanged.
In short: while shelter is clearly slowing...
... Goldman got all the other key components wrong...
... but that doesn't matter because as we said in our preview, all the markets and pundits care about is the price action. Which in turn leads us to the second main point of Goldman's note: the change of its Fed call.
We are changing our Fed call to remove the hike we had previously expected in June. We continue to expect a hike in May, which would raise the target range 5-5.25%. While the large step down in shelter inflation is encouraging news for the inflation outlook, the March CPI report was in line with our expectations overall and is not the main reason for the change. Instead, we have taken out the June hike in part because the limited data available so far appear to confirm that credit is indeed somewhat tight in the aftermath of the banking turmoil, and in part because some Fed officials appear hesitant about even a May hike, which raises the bar for the FOMC to agree at its May meeting to both hike and signal additional tightening not currently implied by the median dot.
To summarize, previously Goldman predicted a FED pause in March, followed by hikes in May and June. But since the Fed did hike in March, what Goldman is doing is bringing forward the end of the hiking cycle by one month (May instead of June). And since most other banks ape what Goldman says, expect the "final" May hike to become consensus within 24 hours.