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Goldman Sachs has revised its projections for the Federal Reserve’s interest rate policy, now expecting two rate cuts in 2024. The adjustment comes as a result of a cooling in inflation. Previously, Goldman Sachs had predicted that the Fed would begin cutting rates in December. The new forecast suggests that the Federal Funds Rate will be around 4.875% by the end of 2024, lower than the previous forecast of 5.13%.
The government may implement interest rate cuts after a series of quantitative tightening policies aimed at controlling inflation. Once inflation is under control, the Fed may cut interest rates to stimulate economic growth and reduce borrowing costs.
Despite indications of a stronger-than-expected US labor market and declining prices, Goldman Sachs analysts believe that “insurance cuts” are not imminent. However, the improved inflation news could lead to “normalization cuts” happening earlier than expected. The analysts also expect Federal Open Market Committee (FOMC) participants to remain cautious and less optimistic in their inflation forecasts.
While the Fed has raised its policy rate by 5.25 percentage points over the last 20 months, the personal consumption expenditures (PCE) price index still shows inflation above the Fed’s 2% target. The unemployment rate remains low at 3.9%, slightly higher than when the Fed first began raising rates in March 2022.
There is speculation among traders about the possibility of rate cuts starting in May, potentially bringing the policy rate into the 4.00%-4.25% range by the end of 2024. However, New York Fed Bank President John Williams does not share this view, citing uncertainty about the future policy path. Williams expects inflation to end this year at 3% and decrease to 2.25% in 2024 as economic growth slows and the unemployment rate rises.
The upcoming presidential election in November adds a political dimension to the decision-making process regarding interest rates. The Fed may hold rates steady for the third meeting in a row and assess data that aligns with a “soft landing” scenario. However, they also want to keep the option open for further rate increases if inflation does not decline as expected.
The goal of potential rate cuts would be to keep pace with falling inflation and stabilize the “real” cost of borrowing, rather than acting as an economic rescue.