We are pleased to bring you the latest economic outlook from Goldman,
Sachs & Co. to assist your credit union in its ongoing efforts
to stay abreast of market conditions that could affect your members'
- With their alteration of the ''balance of the risks''
statement, Fed officials signaled a fundamental shift in monetary
policy. Inflation is now too low, rather than too high. As a result,
the long-standing policy of opportunistic disinflation is no longer
appropriate. Instead, Fed officials want the economy to grow fast
enough to put pressure on resources and push the inflation rate
- This means that policy will now be reactive rather than preemptive.
The implication is that Fed officials will not tighten monetary
policy for a long time. In this respect, the market response since
the FOMC meeting has been appropriate, with the yield curve flattening
significantly over the past ten days.
- We believe that Fed officials should go even further and precommit
to keeping the federal funds rate low until the core PCE* deflator
rises to 2% on a year-over-year basis. Although this would require
some sacrifice in terms of policy flexibility, the benefits would
include a stronger anchor for keeping inflation expectations in
positive territory and an even flatter yield curve.
- The latest inflation indexes bear out the Fed's concern, with
core consumer prices flat for the second month in a row in April
and up only 1% at an annual rate over the past six months. With
activity data also indicating that the postwar rebound is still
more forecast than fact, the probability of a 50-basis-point rate
cut by mid-year has risen further.
- A dividend tax cut of some form is all but a done deal now that
the US Senate has approved a bill containing a truncated exclusion.
Significant differences between the House and Senate tax bills
still need to be ironed out, and that will take time. In our view,
the final bill will more closely resemble the Senate version since
this is where the votes have been harder to muster.