Goldman with the note. The more we rally here the more this tightening is undone. Moreover, US growth needs to fall below potential if inflation is to fall. I am no inflationista but still think more will be required in the US.
Our US Financial Conditions Index (FCI) has tightened by 80bp since Fed officials forecasted 2.8% growth for 2022 (Q4/Q4) in the March Summary of Economic Projections (SEP). How large a growth downgrade should we expect from the Fed if the recent FCI tightening is sustained?
Historically, we find that a 100bp FCI tightening leads to a 0.7pp downgrade in year-ahead SEP growth forecasts. Combined with the 2.7% year-ahead growth forecast in the March SEP, this suggests that the recent FCI tightening alone would push the June SEP year-ahead forecast down to roughly 2% and thus much closer to potential.