The Federal Reserve is now expected by Goldman Sachs economists to lower interest rates in September as opposed to July. It’s a recalibration that takes into account the bigger picture and acknowledges the difficulty in determining the exact moment.
The bank’s economists, under the direction of Jan Hatzius, noted in a note on Friday that the Fed policymakers’ statements this week indicated a July decrease would necessitate both a significant slowdown in inflation and job market slack.
Hatzius wrote, “This does not seem like the most likely outcome.” Last week saw a decline in the number of Americans applying for unemployment benefits, which has remained historically low.
It shouldn’t be shocking that Goldman revised down its rate cut prediction for July. Both Cleveland Fed President Loretta Mester and Fed Governor Christopher Waller essentially ruled out the prospect of a summer cut in their speeches this week.
The investment bank’s September projection now aligns with what the market anticipates. Interest-rate futures pricing indicate 52.2% odds of a drop in September compared to a mere 12% likelihood in July, per the CME FedWatch Tool.
The bank did not alter its projection of two cuts in 2024. In December, a second rate cut is anticipated.
It has become difficult to predict when the first cut would occur and how quickly rates will drop once reductions start because of shifting economic circumstances. Given the strength of the economy, Hatzius said last year that cuts wouldn’t start until December of this year. However, he quickly revised his prediction to three cuts in 2024.
Hatzius’s assessment in January coincided with the market’s general enthusiasm for five rate cuts, the first coming in March following the Fed’s announcement that interest rates had peaked. His team has since reduced their request for the pace of cuts many times.
It’s not just Hatzius who is fighting: A lot of economists have had to change their minds. It’s less obvious that rate cuts are necessary because inflation has been well above the Fed’s 2% objective this year while the labor market and economic growth have remained robust.
Views vary within Goldman. CEO David Solomon said this week that he sees no rate cuts this year. The economy is resilient and inflation is likely to be more persistent, he said at an event.
President John Waldron challenged Hatzius’ former perspective at a conference this week. He questioned whether the Fed can move as fast as the bank’s economists predicted.
To be sure, Hatzius also erred on the side of caution in his Friday note. He wrote, “we continue to see rate cuts as optional, which lessens the urgency.”
It’s hard to be too confident.
