Goldman Sachs economists have dropped expectations for Federal Reserve interest rate cuts in 2024 to four from five previously, with the first reduction not coming until June.
The shift was prompted by recent comments from Federal Reserve officials and minutes of the latest policy meeting, as chief economist Jan Hatzius and his team told clients in a note late Thursday.
Goldman pointed to “no rush” remarks on Thursday from Federal Reserve Gov. Christopher Waller, who said that the central bank wanted to see continued progress on inflation that started in the last half of last year.
“Because there are only two rounds of inflation data and a little over two months until the May FOMC meeting, his comments suggest to us that a rate cut as early as May, which we had previously expected, is unlikely,” he said.
On the same day, Philadelphia Fed President Patrick Harker said investors shouldn’t look for any immediate cuts, because the “greatest risk” will come from cutting too early.
“Governor [Michelle] Bowman emphasized that the time for rate cuts was ‘certainly not now,’ President [Neel] Kashkari noted that he wanted to ‘get a little bit further away before we start lowering rates,’ and President [Raphael] Bostic said that he expected that the FOMC would ‘start returning our policy stance to a more neutral stance in the summer time,” said Hatzius and his team, summing up recent comments from Fed speakers.
They nodded to the minutes of the Fed’s January meeting out Wednesday that showed indeed, most Fed officials were in no hurry to lower rates. Recent U.S. consumer and producer price data for January came in hotter-than-expected.
Hatzius and his team see a couple of changes in Fed thinking afoot, the first being a pileup of strong activity data that’s fading concerns by officials about the risk of too-high-for-too-long rates. They “appear to have shifted toward our view that the largest risk from past rate hikes are behind us and cuts are therefore not urgently needed,” said Goldman.
The second change is that Fed officials seem to now want more concrete signs inflation will reach 2% before a cut, on the view a stronger economic performance could make it harder to bring down inflation. That’s opposed to a former stance by Fed Chairman Jerome Powell that rate cuts should come “well before” inflation hits 2%.
The January inflation data that spooked financial markets remains an “outlier” for Goldman economists, who expect core PCE inflation to dip to 2.5% on annual basis by the May Federal Open Market Committee meeting and 2.2% by the June Fed gathering.
Goldman expects rate cuts in June, July, September and December, followed by four more in 2025, versus just three previously, which implies no change to their 3.25% to 3.5% view of the terminal rate. Also this week, UBS shifted cut its own Fed rate-cut expectations to 75 basis points in total this year from 100 basis, starting in June instead of May.
Futures-market pricing implies just over a 20% chance 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 a roughly 70% chance of a June cut.
