Goldman Sachs economists have revised their expectations for Federal Reserve interest rate cuts in 2024, decreasing the number of expected cuts to four from five. The first reduction is now anticipated in June, signaling a shift in the previous forecast.
Recent Comments and Policy Meeting Discussions
This adjustment in outlook was influenced by recent statements made by Federal Reserve officials and insights from the latest policy meeting. Chief economist Jan Hatzius and his team conveyed this update to clients in a note issued late Thursday.
Cautious Approach
Goldman highlighted remarks emphasizing a cautious approach towards rate cuts by various Federal Reserve representatives. Comments from Federal Reserve Gov. Christopher Waller emphasized the importance of observing sustained progress in inflation trends, particularly evident in the latter part of the previous year.
Delayed Rate Cut Expectations
Considering the limited availability of inflation data leading up to the May FOMC meeting, Waller's comments suggested that an early rate cut in May, previously anticipated by Goldman, is improbable.
Steadiness Advocated
Members of the Fed, including Governor Michelle Bowman, President Neel Kashkari, and President Raphael Bostic, echoed sentiments advocating patience before considering rate adjustments. They highlighted the need for a cautious approach to transitioning the policy stance towards a more neutral position during the summer months.
Fed Meeting Insights
The recently released minutes from the Fed's January meeting supported the notion that a majority of officials are not in a rush to implement rate cuts. Additionally, the report mentioned that recent U.S. consumer and producer price data for January exceeded initial expectations, indicating potential inflationary pressures.
As per the updated analysis by Goldman Sachs economists, the landscape for Federal Reserve interest rate cuts in 2024 portrays a more measured and deliberate approach than previously anticipated.
Shift in Fed Thinking
Hatzius and his team at Goldman Sachs have identified two key changes in the Federal Reserve's thinking:
1. Fading Concerns
The first change is a shift away from concerns about rates being too high for too long. Strong activity data has alleviated these worries among officials, leading them to believe that the biggest risks from past rate hikes are now in the past. This has diminished the urgency for rate cuts.
2. Inflation Target
The second change involves Fed officials seeking more concrete evidence that inflation will reach the 2% target before considering a rate cut. The view is that a stronger economic performance could make it challenging to bring down inflation. This contrasts with Fed Chairman Jerome Powell's previous stance that rate cuts should precede hitting the 2% inflation mark.
Inflation Outlook
Goldman economists consider the January inflation data as an outlier and expect core PCE inflation to drop to 2.5% on an annual basis by the May Federal Open Market Committee meeting and 2.2% by the June Fed gathering.
Rate Cut Expectations
Goldman foresees rate cuts in June, July, September, and December of this year, followed by four more cuts in 2025. This aligns with their unchanged view of the terminal rate falling between 3.25% to 3.5%. Similarly, UBS has adjusted its Fed rate-cut projections to 75 basis points in total for this year, starting in June instead of May.
Market Implications
Currently, futures-market pricing indicates slightly over a 20% probability of a reduction in the federal-funds rate (currently at a target range of 5.25% to 5.50%) at the FOMC's May meeting and approximately a 70% likelihood of a June rate cut.
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