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Goldman Forecast a Moves Back Rate-cut . The Economy is Tough to Predict

May 26, 2024
minute read

Goldman Sachs economists now forecast that the Federal Reserve will cut interest rates in September, rather than in July. This adjustment aligns with the broader market view and underscores the difficulty of predicting the precise timing of rate changes.

In a note released on Friday, Goldman’s team of economists, led by Jan Hatzius, indicated that recent speeches from Fed officials suggested that a July rate cut would necessitate both a significant reduction in inflation and notable softness in the labor market. “This does not look like the most likely outcome,” Hatzius wrote. He pointed out that the number of Americans applying for unemployment benefits remains historically low, indicating a robust labor market.

Goldman’s shift from a July to a September rate cut should not be surprising. Fed Governor Christopher Waller and Cleveland Fed President Loretta Mester both effectively ruled out the possibility of a summer cut in their speeches this week. Consequently, Goldman’s new September forecast now aligns with market expectations. According to the CME FedWatch Tool, the probability of a rate cut in September stands at 52.2%, compared to just a 12% chance in July.

The bank maintained its prediction of two rate cuts in 2024, with the second reduction anticipated in December. The timing of the initial cut and the pace of subsequent reductions have been challenging to predict due to shifting economic conditions. Last year, Hatzius forecasted that rate cuts would not begin until December 2024, citing the economy’s strength. He later revised this to three cuts in 2024.

In January, Hatzius’s outlook matched the market's optimism, predicting five rate cuts with the first in March, following indications from the Fed that rates had peaked. However, his team has since revised their projections multiple times, reflecting changes in economic conditions.

Hatzius is not alone in facing these forecasting challenges. Many economists have had to adjust their predictions. Inflation has remained significantly above the Fed’s 2% target this year, while the labor market and economic growth have remained strong, making the need for rate cuts less clear.

There are differing views within Goldman Sachs itself. CEO David Solomon expressed skepticism about rate cuts occurring this year, citing the economy’s resilience and the likelihood of persistent inflation during a recent event. Meanwhile, President John Waldron questioned the pace at which the Fed could move, challenging Hatzius’ previous predictions at a conference this week.

Despite these internal differences, Hatzius maintained a cautious stance in his Friday note. He wrote, “we continue to see rate cuts as optional, which lessens the urgency.” This cautious approach highlights the inherent uncertainty in making confident economic forecasts.

The broader economic context further complicates predictions. The resilience of the labor market and persistent inflation pressures suggest that the Fed might not be in a hurry to cut rates. While some indicators point to potential easing, the overall economic strength complicates the decision-making process for the Fed.

Moreover, the mixed economic signals have led to varied interpretations among analysts and market participants. While some see the current conditions as justifying a delay in rate cuts, others believe that the Fed might need to act sooner to address inflation concerns effectively.

This uncertainty is reflected in the market’s response. The probability of a rate cut in September, as indicated by the CME FedWatch Tool, remains just above 50%, highlighting the market's cautious optimism. Investors and analysts alike are closely watching upcoming economic data, particularly inflation and labor market indicators, to gauge the Fed’s next move.

Ultimately, the question of when the Fed will begin cutting rates remains open-ended. The evolving economic landscape and the Fed’s data-driven approach mean that predictions are subject to change as new information becomes available. For now, Goldman Sachs and the broader market are hedging their bets on a September rate cut, but the situation remains fluid.

In summary, while Goldman Sachs has adjusted its forecast to a September rate cut, the ongoing economic resilience and persistent inflation complicate the outlook. The varying opinions within Goldman and among market analysts underscore the uncertainty and difficulty of making precise economic predictions in the current environment. As a result, the timing and pace of rate cuts remain key points of speculation and debate.

Eric Ng
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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