Goldman Sachs has brought forward its Fed interest rate cut forecast. The bank, which previously expected the rate cut to begin in December, may now begin in September, stressed that the inflationary effects of customs duties appearing to be “more limited than expected” were influential in this decision.
“While this is still unclear, we think the probability of a September rate cut is above 50%. This could be driven by the effects of weaker tariffs, larger disinflationary cushions and either a genuinely softening labor market or fears of monthly volatility,” the economic team led by Goldman Sachs Chief Economist Jan Hatzius wrote in a note.
The bank expects the Fed to cut interest rates by 25 basis points three times during the rest of the year. These cuts are expected to occur at meetings in September, October and December. It also lowered its final interest rate expectation to 3-3.25%. It had previously forecast a range of 3.5-3.75%.
Goldman analysts said, “If the Fed has some kind of insurance motive in its interest rate cuts, the most natural option would be to make cuts at back-to-back meetings, as in 2019.” However, it was stated that a cut is not expected in July and that this could only be on the agenda if the employment data to be released this week comes in much weaker than expected.
The bank noted that the labor market was still “healthy,” but added that “finding a job has become more difficult.” It also said that seasonal effects and changes in immigration policy could pose downside risks to employment data in the near term.
*This is not investment advice.