GOLDMAN: We expect the Fed to hike rates in September, but there's a 'strong' case for delaying
But then maybe the Fed should wait until 2016.
In a research note Tuesday, Goldman Sachs chief economist Jan Hatzius makes the case for both scenarios.
Goldman forecasts that the Fed will hike in September because the economy is growing as expected.
Hatzius illustrates with the chart below, based on a simulation of the Fed's projections for inflation, growth and the labor market, and the standard Taylor Rule.
The Taylor Rule stipulates how central banks should change rates based inflation, gross domestic product, and other economic conditions.
Here's Hatzius:.
"For the first time in many years, the case for higher short-term interest rates looks reasonable to us, at least in the economic base case."
"Exhibit 1 shows that the resulting path for the funds rate is very similar to the median funds rate projection in the Summary of Economic Projections (SEP.) Thus, the FOMC's policy path now looks consistent with a Taylor 1999 rule with a focus on broad labor market slack. From our perspective--which has long emphasized that headline unemployment rate U3 is an incomplete measure of labor market slack--this seems like a sensible policy in the FOMC's base case for the economy (which is broadly similar to our own at this point)."
Of course, this call is anchored on the expectation that the economy will rebound after contracting in the first quarter.
And that's not a given, so the Fed may have to wait until next year.
"Nevertheless, we still see a strong risk management case for delaying liftoff," Hatzius wrote.
Apart from doubts about how the economy performs in the short term, there's dispute over whether the headline unemployment rate - which is at a seven-year low - accurately captures the amount of slack there is in the labor market.
But what's certain for Hatzius is that the Fed doesn't need to move sooner than the economic outlook dictates.
There's no need to 'test the waters' as some have suggested, given concerns about sudden gyrations in financial markets.
Here's the chart showing that a rate hike is expected this year if the economy stays on track.
