Goldman Sachs predicts three rate cuts by mid-year
According to strategists at Goldman Sachs, the Federal Reserve is likely to begin cutting interest rates earlier than previously anticipated. The analysts, led by Jan Hatzius, now expect the central bank to trim the benchmark rate by 25 basis points during its meetings in March, May, and June. This marks a significant shift from their previous forecast which only expected two cuts to begin in the third quarter of 2024.
“In light of the faster return to target, we now expect the FOMC to cut earlier and faster,” stated Hatzius and his team in an analyst note on Wednesday.
Shift in Fed’s stance after a steady hold
This change in forecast comes after the Federal Reserve voted for the third consecutive month to hold interest rates steady at a range of 5.25% to 5.5%, the highest level in 22 years. However, central bankers also hinted at the conclusion of their nearly two-year fight against inflation, forecasting a series of rate cuts in 2024.
In a statement released after the meeting, the policy-setting Federal Open Market Committee acknowledged that “inflation has eased over the past year but remains elevated.” They also stated that they would monitor the economy to determine if any additional rate hikes are necessary, indicating that further tightening may not be needed at this point.
Economic projections and expectations for rate cuts
During the post-meeting press conference, Fed Chair Jerome Powell explained, “We added the word ‘any’ as an acknowledgment that we are likely at, or near, the peak rate for this cycle. But participants also didn’t want to take the possibility of further hikes off the table.”
Fed officials have also signaled the possibility of multiple rate cuts next year as inflation cools down and the economy shows signs of slowing in response to tighter monetary policy. Updated quarterly economic projections show that a majority of officials expect rates to drop to 4.6% by the end of 2024, implying at least three quarter-point rate cuts in 2024. Policymakers have also indicated additional rate cuts in 2025 and 2026.
Other major banks on Wall Street have also adjusted their expectations for rate cuts next year. UBS Global Wealth Management forecasts the Fed will start unwinding policy in May, while JPMorgan Chase and Bank of America project the first rate cut to come in June.
As the Federal Reserve takes a more dovish stance, the impact of these rate cuts on the overall economy remains to be seen.