Goldman Sachs now projects two interest rate cuts by the US Federal Reserve next year, advancing its expectation for the first cut to the third quarter, citing cooling inflation.
The brokerage had earlier predicted the Fed to begin cutting rates next December.
Two cuts would imply a Federal Funds Rate of 4.875 percent by the end of 2024, compared to its previous forecast of 5.13 percent .
While data on Friday showed a stronger-than-expected US labor market, traders bet that the Fed will still proceed with interest-rate cuts next year amid declining prices. They expect the first cut to occur in March.
“Healthy growth and labor market data suggest that insurance cuts are not imminent… But the better inflation news does suggest that normalization cuts could come a bit earlier,” Goldman Sachs economist Jan Hatzius said in a note dated Dec. 10.
Inflation data last month showed US consumer prices were unchanged in October as Americans paid less for gasoline, and the annual rise in underlying inflation was the smallest in two years.
Goldman Sachs believes some participants might “pencil in more cuts than before in response to the inflation news, but others might hold back to avoid encouraging the market to price too many cuts too soon.”
“Our own inflation forecast is a touch lower, but FOMC (Federal Open Market Committee) participants will likely still prefer to err on the side of being less optimistic,” adds Hatzius.
Even as traders bring forward the expected timing of the Federal Reserve’s first interest rate cut, the gap since the U.S. central bank’s last hike will probably be one of the longest on record.
Lengthy periods of economic and policy stability are surely preferable to the Fed regularly scrambling to cut rates only a few months after they have peaked, but they can foster complacency and leverage in financial markets. – Reuters
