Goldman Sachs: Fed Rate Cuts to End Around 3.25-3.5%, 100 Basis Points Higher Than Previous Peak

The Federal Reserve's recent decision to cut interest rates has sparked a wave of speculation about the endpoint of this round of rate cuts. Goldman Sachs, a leading investment bank, has weighed in with a projection that the Fed's rate cuts will end around 3.25-3.5%, which is 100 basis points higher than the peak of the previous cycle. This article explores the historical precedents, economic indicators, and potential implications of this projection.



Historical Fed rate cut cycles since 1980 have varied in magnitude and duration. The average cut within a year after the first cut is 235 basis points. The current cycle, projected to end with a 50 basis point cut, is significantly smaller than the average. For instance, the 1984 cycle saw a 375 basis point cut, while the 2001 and 2007 cycles, which coincided with recessions, saw an average cut of 400 basis points. The current cycle's projected endpoint is more aligned with the 1995 and 1998 cycles, which saw more modest cuts of 25 and 75 basis points, respectively.

Economic indicators, particularly employment data and Treasury spreads, significantly influence the Fed's decision-making process in determining the endpoint of rate cuts. Employment data, such as jobless claims and unemployment rates, are reliable indicators of economic health following rate cuts. In recessionary cases, these metrics consistently rise after the Fed's rate cuts, as seen in the 2001 and 2007 recessions. The spread between the 2-year and 10-year Treasury also tends to increase if a recession is imminent, as it did before the 2001 and 2007 recessions. By monitoring these indicators, the Fed can assess the effectiveness of its rate cuts and adjust its policy accordingly. For instance, in the 2001 and 2007 rate cut cycles, the Fed was more aggressive, with average cuts of 400 bps, as these indicators suggested a need for more substantial stimulus.



If this rate cut cycle has a higher endpoint compared to the previous cycle, it could indicate a more aggressive stance by the Fed to combat an impending recession. This could have significant implications for various asset classes. For instance, bonds, particularly long-term Treasury bonds, tend to perform well during rate cut cycles, as yields decrease, leading to price increases. Equities, especially in non-recessionary environments, also tend to benefit from rate cuts, as lower interest rates make borrowing cheaper for businesses, potentially boosting corporate earnings. However, in recessionary cycles, gold often performs well due to its status as a safe-haven asset. Therefore, a higher endpoint for this rate cut cycle could suggest a more challenging economic environment, potentially impacting asset classes differently than in previous cycles.

In conclusion, the endpoint of this round of Fed rate cuts is projected to be around 3.25-3.5%, according to Goldman Sachs. Historical precedents, economic indicators, and potential implications for asset classes all contribute to this projection. As the Fed continues to monitor economic data and adjust its policy accordingly, investors should stay informed about the evolving landscape and its potential impact on their portfolios.