Goldman Thinks The Fed Will Hike Rates In December, Not September

• In the past month, the ProShares Trust Ultra VIX Short Term Futures ETF UVXY has gained more than 130 percent.
• Goldman Sachs' Krag Gregory pointed to the spike in volatility, as well as low inflation and weaker financial conditions, as evidence that the Federal Reserve would wait to raise interest rates.
• The Federal Reserve will announce its decision on Thursday.

Goldman Sachs' Gregory noted that the VIX, the CBOE's volatility measure, was at 23.2, three points "above its 1990-present average and 9 points above its 2013-2014 average." At those elevated levels, the economists ask, "Will the Fed hike with the VIX at 23?" The answer, according to Gregory, is "No."

Instead, Gregory said that "low inflation and weaker financial conditions solidify the case for a December lift-off." Immediately, that means that the VIX will move lower. However, Gregory warned that, "Even if the VIX does calm down we do not expect it to settle back into the low teens like it was from 2013 to mid-August 2015." The global economy is just too uncertain, Gregory noted.

Goldman said that the "recent deterioration in financial conditions" is an "added concern" for the Fed as it heads into the meeting. In fact, according to Goldman economist Jari Stehn, it has the impact of "three hikes in the funds rate." This gives the Fed "one more reason" to stay on hold until December.

When the Federal Reserve does raise interest rates, Goldman suggested that SPDR S&P 500 ETF Trust SPY one-, two-, and three-month returns tend to be negative after an initial rate hike.