Surprise Fed rate hikes to hurt stocks, boost yields and US dollar – Goldman Sachs

In its latest report, Goldman Sachs Group Inc. economists developed a model, which assesses the impact of the Federal Reserve (Fed) rate hikes on financial conditions and the US economy under various scenarios.

Key Highlights (courtesy Bloomberg):

“An unexpected 1.5 percentage points of Fed rate rises would tend to boost 10-year Treasury yields by 45 basis points, cut equity prices by 9 percent and boost the dollar by 4 percent.

Anticipated monetary moves have a "much smaller" effect.

Our rule of thumb is that a 1 percentage point fall in the unemployment rate raises wage growth by 0.35 percentage points, but leads to a more modest 0.1 percentage-point rise in core PCE inflation.

Goldman’s model now calculates the risk of a recession is 26 percent on a two-year horizon, up 5 percentage points this year -- mostly due to tightening financial conditions -- but still below average. For a three-year horizon, recession risk is now 43 percent, “just above the historical average.”