Like many others, Goldman Sachs now believes the Federal Reserve will start interest rate cuts in 2024, earlier than first thought.
In a note on Sunday, the firm’s economics team, led by Jan Hatzius, stated they anticipate rate cuts in 2024 starting in the third quarter. This also marks a shift from their earlier prediction, which foresaw cuts commencing in the fourth quarter.
Goldman Sachs clarified that their revised stance doesn’t signify a significant change in their perspective but stems from reaching the previously outlined cutting thresholds sooner.
In a note on Sunday, the firm’s economics team highlighted that inflation is expected to decline more rapidly next year than initially projected.
Now, Goldman Sachs economists anticipate a swifter decline in inflation next year compared to their initial projections.
Specifically, they foresee the core Personal Consumption Expenditures index, the Fed’s preferred measure of inflation, reaching 2.5% by the second quarter of next year.
The forecast stands in contrast to their earlier expectation in September, which placed the crossing of this threshold in the fourth quarter of 2024.
Changes their Previous Forecast for Rate Cuts in 2024
As of October, the most recent month with available data, the core Personal Consumption Expenditures (PCE) index increased by 3.5% compared to the previous year. This exceeds the Federal Reserve’s targeted inflation rate of 2%.
Goldman Sachs describes the anticipated interest rate reductions as “normalization cuts,” portraying the central bank’s effort to decrease rates from 22-year highs.
According to the Goldman team, the majority of Federal Reserve officials believe that the range of 5.25% to 5.50% is significantly above the neutral rate.
They argue that maintaining the funds rate at this level is deemed unnecessary and inappropriate once the inflation issue has been resolved.
Anticipations suggest that the Federal Reserve will maintain interest rates within this range when it announces its last monetary policy decision of the year on Wednesday afternoon.
Goldman Sachs made this call a day before the release of the November Consumer Price Index (CPI) report and two days before the Federal Reserve’s final monetary policy announcement for the year.
Additionally, on Wednesday, the Fed’s “dot plot” is expected to unveil new interest rate forecasts for the upcoming years.
According to Goldman Sachs, the majority of Federal Open Market Committee (FOMC) participants are likely to view the recent inflation figures as a genuinely positive surprise.
The Goldman team suggests that, as a result, some participants may consider incorporating more interest rate cuts than initially anticipated.
However, some participants might exercise caution for strategic reasons. Rapid easing of financial conditions, driven by expectations of earlier rate cuts, has occurred recently.
While participants may not view this as a significant concern, they might opt to avoid encouraging the market to anticipate too many cuts prematurely.
Cautions for Fluctuations in Inflation
Goldman Sachs’ team anticipates that the dot plot will reveal a consensus among most Federal Reserve officials for 50 basis points, or 0.50%, reduction in interest rates next year.
Despite this expectation, Goldman cautions that confidence in such projections is challenging, emphasizing that slight fluctuations in inflation forecasts could influence the outcome.
Goldman Sachs’ team clarifies that the current inflation scenario doesn’t yet bring comfort to Federal Reserve officials regarding lowering the funds rate.
They suggest that the positive aspect portrayed by the October inflation data might be somewhat overstated.
The Federal Open Market Committee (FOMC) will also need to ensure that wage growth aligns before confidently considering any rate cuts, ensuring it is not premature.
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