Goldman Sachs Anticipates Consecutive 25 Basis Point Fed Cuts

Goldman Sachs, a leading global investment bank, has recently indicated its expectation of a series of consecutive 25 basis point cuts by the Federal Reserve. This projection is based on a combination of factors, including the current inflation trajectory, labor market conditions, and the global economic outlook. This article delves into the reasoning behind Goldman Sachs' forecast and explores the potential implications for the U.S. economy and financial markets.


Inflation Trajectory and Fed Rate Cuts
The current inflation trajectory plays a significant role in shaping Goldman Sachs' expectation for Fed rate cuts. After peaking at 9.1% in mid-2022, inflation has been inching its way down and is now at 2.5%, within spitting distance of the Fed's target of 2%. This decline in inflation has led the Fed to lower its benchmark federal funds rate, which is currently in the 4.75% to 5% range. Goldman Sachs anticipates further cuts to help bring inflation back to the target level while balancing the risks to the economy.

Labor Market Conditions and Consecutive Cuts
Labor market conditions also play a crucial role in Goldman Sachs' expectation for consecutive 25 basis point cuts. The unemployment rate has fallen to 4.051% in September, below the level in July and marginally below the June level of 4.054%. This decline in unemployment, coupled with strong nonfarm payroll growth, indicates a robust labor market. As the labor market remains solid, the Fed is likely to continue its gradual rate-cutting approach to support economic growth without fueling inflation.

Global Economic Outlook and Fed Policy
The global economic outlook also influences Goldman Sachs' projection for Fed policy. The strong activity data, including real GDP growth of 3% in the second quarter and an estimated 3.2% in the third quarter, coupled with the recent rebound in oil prices, has not changed Goldman Sachs Research's conviction that inflation will cool further. The alternative rent indicators have declined again, reinforcing the forecast that rent and owners' equivalent rent (OER) will continue to decelerate. This positive outlook on the global economy supports the Fed's decision to lower interest rates and maintain a soft-landing trajectory for the U.S. economy.


Impact of Consecutive 25 Basis Point Cuts
The potential impact of consecutive 25 basis point cuts on the U.S. economy and financial markets is multifaceted. These rate cuts are expected to boost consumer spending and business investment by lowering borrowing costs. This, in turn, could stimulate economic growth and support the housing market. However, the impact on mortgage rates and affordability may be limited, as more than 90% of borrowers have fixed-rate loans. Additionally, the cuts could affect the U.S. dollar's exchange rate and international trade, as well as the yield curve and the bond market. Investors should closely monitor these developments to make informed decisions about their portfolios.

In conclusion, Goldman Sachs' expectation of a series of consecutive 25 basis point Fed cuts is based on a combination of factors, including the current inflation trajectory, labor market conditions, and the global economic outlook. These rate cuts are anticipated to have a positive impact on the U.S. economy and financial markets, but investors should remain vigilant to the potential implications for various sectors and asset classes. As the Fed continues to adjust its policy, investors should stay informed about the latest developments and their potential impact on their portfolios.