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Goldman Sachs now sees Fed rate increase Tuesday
Fri Sep 16, 2005 02:57 PM ET
NEW YORK, Sept 16 (Reuters) - Goldman Sachs said on Friday it no longer expects the Federal Reserve to pause in its campaign to tighten interest rates at Tuesday's policy meeting.
In a note to clients, Goldman Sachs economists said the energy price shock generated by Hurricane Katrina as well as greater uncertainty about the economic outlook had "created a rationale for a pause."
"However, given the Fed's apparent comfort with market expectations and press reports to the contrary, we reluctantly have to conclude that a rate hike is now the most likely outcome next week," the economists said.
The Federal Reserve holds its next regular policy meeting on Sept. 20, and the majority of Wall Street finance houses polled by Reuters expects another quarter-point rate increase, which would be the 11th in a row.
Goldman Sachs said that over the longer term, the reconstruction of productive capacity destroyed by Katrina would boost both growth and inflation.
"Assuming that the economy proves resilient, as we expect, the longer-term impact of Katrina will be to lift interest rates," they said.
"In fact, given that Katrina has worsened the growth/inflation trade-off, there is a risk of a higher peak in interest rates than before," Goldman Sachs said.