Here Is What Goldman Sees For The Economy And Fed Hikes In 2018

Goldman thinks the labor market is going to overheat materially in 2018, inflation pressures are going to materialize, and growth is going to be above-trend thanks to hurricane reconstruction activity (ahem, broken windows) and Republicans cramming through tax cuts in some form or another.

That, Jan Hatzius and company figure, will prompt the Fed to deliver four hikes in 2018, in addition to the December hike. That’s above the median in the September dots and above market forwards as well.

On Goldman’s read, the Fed has been trying to “tap lightly on the brakes” with a series of hikes, but this has turned out to be one of those situations where someone apparently cut the brake line. “Although this path of tightening came as a significant hawkish surprise to financial markets, it proved too little to achieve the desired tightening in broader financial conditions,” Goldman writes, adding that “instead, our financial conditions index (FCI) has eased meaningfully over the last year.”

And so, unable to stop the train, the unemployment rate continued to dive to even more unsustainable levels while the economy picked up still more steam. “This is not how Fed officials envisioned 2017 drawing to a close,” Goldman goes on to write.

With the economy rolling along and growing at a rate that’s ahead of GS’s estimate of the long-term potential growth rate and well ahead of its short-term potential rate, the bank figures that between rebuilding that which hurricanes destroyed and former employee Gary Cohn coming through on tax reform (and then, if media reports are any indication, hightailing it out of dodge before the administration crashes and burns), there’s more upside from here. Here’s Goldman’s take on the boost from tax reform:

And it’s not just specialty items (if you will) driving the economy onward and upward. Goldman also says “the fundamental picture” should “remain encouraging” with healthy consumption growth and job creation, etc. etc. The bottom line: Goldman sees GDP growth of 2.5% in 2018 Y/Y, or 2.3% on a Q4/Q4 basis.