Goldman Sachs sees lower odds of September QE3 on data gains

Aug. 15 (Bloomberg) -- Stronger U.S. economic data have reduced the probability that the Federal Reserve will announce a third round of so-called quantitative easing when policy makers gather next month, Goldman Sachs Group Inc. said.

“We do not expect a move to QE3” at the Sept. 12-13 Federal Open Market Committee meeting, Jan Hatzius, chief economist at Goldman Sachs in New York, wrote yesterday in a note to clients, citing retail sales that rose more than forecast in July. Economic growth probably accelerated, he said.

“While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion,” Hatzius wrote. “The U.S. economic recovery remains sluggish, but we believe that it will pick up a bit in coming months.”

Additional asset purchases by the central bank are less likely next month as strengthening retail sales and slowing inventory accumulation by businesses signal that “U.S. economic data continue to look a bit stronger,” Hatzius wrote. Economic growth in the third quarter probably accelerated to 2.3 percent from an earlier tracking estimate of 2.2 percent, the economist said, citing Goldman Sachs estimates.

“Although Fed officials clearly adopted a strong easing bias at the July 31-Aug. 1 FOMC meeting, we do not think that this amounts to a pre-commitment to QE3,” Hatzius wrote. “Instead, we believe that continued weakness is necessary to prompt a substantial easing move. And so far, that weakness is not showing up in the data.”

Retail, Inventories

Retail sales increased 0.8 percent in July, the biggest gain since February and first gain in four months, the Commerce Department said Aug. 14. A separate report the same day showed that inventories at U.S. companies rose in June at the slowest pace in nine months.

“There is a very solid case for additional accommodation under the Fed’s dual mandate of maximum employment and 2 percent inflation,” Hatzius wrote in the report published yesterday after U.S. markets closed. “We do believe that Fed officials will ultimately decide to ease policy further.”

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