Goldman Sachs Analyst on Upcoming Fed Rate Decision - FJElite

Fed: Key event in many ways, has prevented investors from adding risk. We simply need to get through it. The objective case for a July hike isn't particularly compelling. Officials have kept the door open, but recent data hasn't justified moving early. We've had softer labor data, softer inflation and while inflation remains above target, there isn't an obvious need to rush. The argument for hiking is really about credibility... getting ahead of the curve and reinforcing the Fed's inflation-fighting credentials. There is a scenario where they surprise with a hike but soften the surprise with an emphasis of a meeting by meeting rather than the start of an aggressive tightening cycle. Markets would initially sell off, the curve would flatten and small caps would probably bear the brunt. But I'm not convinced that's ultimately disastrous for equities (we have nearly one hike cumulatively priced to Sept). You cold argue a credible front- end repricing could actually compress term premium and support the long end. Once the dust settled, longer-duration defensives might even outperform. The more likely outcome is no change. That's consistent with a genuinely data dependent Fed. Delaying until September doesn't materially change the story, it simply gives policymakers another round of data. Think we just need to get through it, for equities there has been almost no correlation and given the extent of L/S pain just removing the tail risk should be enough.