Overall, the analysis moderately increases our confidence that today’s economy should be able to weather fairly large rate increases, without spiraling into a recession.

I’m sure Goldman didn’t mean for that to be funny, but it damn sure is.

It’s like saying: “I thought about it and overall, it seems like my house should be able to weather a fairly large storm without collapsing on top of me and my family.”

It’s comforting. Sort of. But sort of not. Because you know, what’s “fairly large”? And also, why are you thinking about that in the first place? Is that something you think might be relevant soon? And finally, what’s with the hyperbole there at the end? “Spiraling into a recession”? Was that really necessary? And if so, why?

Humor aside, it makes sense in context. Goldman is out stress testing the economy for a rates shock and part and parcel of a “stress test” is positing an extreme (or relatively extreme) scenario.

The note reads a bit like a companion piece to something they did in January on the effect a “Black Monday” redux would have on the economy. That analysis centered around the the impact a sudden sharp decline in equity prices would have on financial conditions and the knock-on effect that tightening would have on the real economy. This quote from the January note captures the gist of it pretty well:

We have argued that the most important reason for the acceleration in growth last year and for growth optimism in 2018 is the sharp positive swing in the impulse from financial conditions. The run-up in the equity component of the FCI has accounted for roughly half of the 137bp index easing in 2017 and 80% of the of 32bp easing year-to-date.

The bottom line in the stress test piece (the new note) is that a sharp rise in rates would tighten financial conditions by 200bp and of that 200bp, 110bp of it would be attributable to a 20-25% decline in equity prices.