Goldman Sachs says the Fed could hike rates in September

Goldman Sachs economists believe Fed officials were intentionally sending a strong signal about raising interest rates in September when they met at Jackson Hole, Wyoming, and September remains on the table even with a disappointing jobs report. Goldman is going against the herd, as most economics believe the weakish jobs report for August ruled out a September rate hike. Goldman Sachs chief economist Jan Hatzius, Friday on CNBC immediately after the jobs report's release, but over the Labor Day weekend, the firm's economists issued a more detailed note surrounding their minority view.  Goldman on Friday put 55 percent odds for a hike at the Fed's Sept. 20-21 meeting and 80 percent odds by the December meeting. The firm said the soft jobs report makes it a "close call" for September. As of Tuesday morning, Fed funds futures put odds of a September rate hike at just 26 percent, and only 68 percent by December.

"The strength of the message surprised us, but we don't think it came out of the blue. Back in the spring, the committee was ready to go in June or July, but then the weak May payroll report and the Brexit vote interfered. Now both of these worries have dissipated, the labor market has made further headway, financial conditions are easier than they were three months ago, and no major new risks have appeared," they wrote.  The next metric they are watching is the words of Fed speaSan Francisco Fed President John Williams speaks Tuesday evening in Reno, Nevada, and two Fed presidents — Richmond Fed President Jeffrey Lacker and Kansas City Fed President Esther George — give testimony on Capitol Hill on Wednesday.

But Goldman economists say Fed Chair Janet Yellen set a low bar for the jobs report in her Jackson Hold speech Aug. 26. She specifically said given the "continued solid performance of the labor market and our outlook for economic activity and inflation" that she believed the case for increasing the federal funds rate "strengthened in recent months." They also said the economic data have been mixed but that GDP for the third quarter looks to be stronger, and their forecast is 2.9 percent.

"If they thought a hike made sense then (in June), it should make more sense now. In this context, it is also noteworthy that the number of regional Federal Reserve Bank boards asking for discount rate increases — a barometer of policy sentiment within the system — has risen further in recent months and now stands at 8 (the highest since December)," they wrote. The Fed raised its fed funds rate for the first time in nine years last December but has held firm since then.

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