Goldman Sachs Revises its Forecast for First Fed Rate Cut to September

Goldman's Initial Forecast for 2024

At the beginning of 2024, Goldman Sachs confidently predicted that the Federal Reserve (Fed) would cut rates five times, with the first cut expected in March. This was based on the assumption that the US economy was heading towards a "soft landing," with a slight slowdown in economic growth and a continued decrease in inflation.

Unexpected Inflation Rise

However, the situation didn't unfold as predicted. The supercore inflation saw a sharp rise in recent months, primarily driven by a surge in transportation inflation due to skyrocketing auto insurance prices. Consequently, the Fed found itself in a situation similar to 2023, with inflation proving to be more persistent than anticipated.

Market Expectations for Rate Cut

Recent stronger than expected PMI and initial claims data have disrupted the narrative that "inflation is easing." Following last week's CPI and retail sales miss, the market is now pricing in just 56% odds for a September rate cut, with barely one full December rate cut priced in.

Goldman Sachs Revises its Forecast

Goldman Sachs, which started the year with a confident prediction of five rate cuts, has once again revised the estimated time of arrival for the first rate cut. Jan Hatzius, the bank's chief US economist, stated that they are moving their forecast for the Fed’s first rate cut back from July to September. The justification for this change was that comments from Fed officials suggested a July cut would likely require not just better inflation numbers but also significant signs of softness in the activity or labor market data.

Additional Observations from Hatzius

Jan Hatzius also shared some additional observations. He noted that four more CPI reports will be available by the September meeting. If monthly core CPI inflation averages in the high 20s and core PCE in the low 20s, as expected, then most FOMC participants will likely support a rate cut. This would translate into an annualized inflation of 3%+, indicating that the Fed has effectively abandoned its prior 2% inflation target and is willing to ease even with core inflation in the 3% range.

Goldman's Interpretation of Powell’s Recent Comments

Goldman Sachs interpreted Powell’s recent comments as suggesting a gradual path of cutting rates, acknowledging both the significant progress made in solving the inflation problem and the realities that inflation is likely to remain noticeably above target this year and the economy is performing well at the current level of interest rates.

Challenges in Predicting the Timing of the First Cut

The bank acknowledged that predicting the timing of the first cut remains a challenge due to several reasons. Rate cuts are seen as optional, reducing the urgency. Inflation is expected to be much improved by September but still at a year-on-year rate that makes cutting a less than obvious decision. While the Fed leadership appears to be relaxed about the inflation outlook and will likely be ready to cut before too long, a number of FOMC participants still appear to be more concerned about inflation and more reluctant to cut.

Political Implications

What Goldman Sachs did not mention is that a rate cut in September, just two months before the election, could be seen as political interference by the central bank to influence the election in favor of Biden.

Goldman Sachs vs Other Banks

While Goldman Sachs was once a leader in original economic thought on Wall Street, that's no longer the case. As shown in a chart from WSJ's Nikileaks, almost every other bank was already expecting either September or December as the "first cut."

Closing Thoughts

It's interesting to see how Goldman Sachs, once a pioneer in economic thought, has had to revise its predictions in light of unexpected inflation trends and market responses. It raises questions about the accuracy of economic forecasting and the factors that can influence such predictions. What are your thoughts on this? Do you think Goldman's revised prediction will hold true, or are there more surprises in store? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.