Goldman expects Fed to start rate cuts in Q2 next year

The Federal Open Market Committee (FOMC), according to Goldman Sachs, may begin reducing the funds rate in the second quarter of 2024.

This estimate assumes that core Personal Consumption Expenditures (PCE) inflation will have fallen below 3% on a yearly basis and under 2.5% on a monthly basis.

Even if there is no recession, the FOMC may be persuaded to raise the funds rate to a more neutral level.

“Normalization is not a particularly urgent motivation for cutting, and for that reason we also see a significant risk that the FOMC will instead hold steady. The FOMC might not cut because inflation might not fall enough or, even if it does, because solid growth, a tight labor market, and a further easing of financial conditions might make cutting seem like an unnecessary risk,” Goldman Sachs strategists said in a client note.

While the investment firm is “uncertain about the pace” of rate decreases next year, it anticipates the Fed will cut rates by 25 basis points every quarter. The funds rate should eventually stabilise around 3-3.25%, which is higher than the FOMC’s 2.5% median longer term dot.

Despite 525 basis points of Fed rate hikes since March 2022, the US economy has shown to be extraordinarily robust, expanding at an annualised rate of 2.4% in the second quarter of 2023. Furthermore, inflation has slowed in recent months, albeit it remains above the Fed’s 2% target. These trends increase the likelihood that the Federal Reserve will be able to return inflation to its goal rate of 2% on a long-term basis without causing a significant decline in employment, a so-called “soft landing.”