Goldman Sachs Sees End Point of Fed Rate Cuts Around 3.25-3.5%

The Federal Reserve's recent rate cuts have sparked speculation about the end point of this cycle, with Goldman Sachs offering a unique perspective. The investment bank believes that the Fed's rate cuts will likely conclude around 3.25-3.5%, which is 100 basis points higher than the peak of the previous cycle. This projection is based on a combination of factors, including recent economic data, inflation trends, and market sentiment.

The Fed has been gradually lowering interest rates, with a 25 basis point cut in December 2024 bringing the federal funds rate to a range of 4.25% to 4.5%. This slower pace of rate cuts allows the Fed to monitor the impact of its previous actions and assess the economic landscape before making further adjustments. This approach helps to avoid overstimulating the economy and potentially reigniting inflation.

Goldman Sachs' projection aligns with the Fed's cautious approach to monetary policy, as evidenced by the dot plot adjustments. The dot plot now anticipates just two rate cuts in 2025, totaling 50 basis points, compared to the full percentage point of reductions projected in the previous quarter. This slower pace of rate cuts reflects the Fed's desire to balance the need to support economic growth with the risk of reigniting inflation.

The investment bank's projection is also supported by recent economic data and inflation trends. While inflation has cooled from its peak, it remains above the Fed's 2% target. In July 2024, the Personal Consumption Expenditures Price Index (PCE) came in at 2.5%, which is not far from the target but still above it. This suggests that the Fed should remain cautious about loosening policy too quickly.

Moreover, economic activity remains solid, with GDP growth projected to be 3% annually. This strong economic performance, coupled with the Fed's commitment to achieving its mandated goals of maximum employment and stable prices, supports Goldman Sachs' projection of a higher end point for this round of rate cuts.

Market sentiment and investor behavior also play a significant role in shaping the end point of the current rate-cutting cycle. Despite the Fed's aggressive rate cuts, markets have not followed suit. Mortgage rates and Treasury yields have risen sharply, indicating that markets do not believe the Fed will be able to cut much more. The policy-sensitive 2-year Treasury yield jumped to 4.3%, putting it above the range of the Fed's rate.

This divergence between market expectations and the Fed's actions suggests that investors are pricing in higher inflation expectations and adjusting their portfolios accordingly. As a result, the end point of this rate-cutting cycle will be influenced by market dynamics as much as by the Fed's policy decisions.

In conclusion, Goldman Sachs' projection of an end point for this round of Fed rate cuts around 3.25-3.5% is supported by recent economic data, inflation trends, and market sentiment. The Fed's cautious approach to monetary policy, coupled with the strong economic performance and the influence of market dynamics, suggests that this projection is a realistic assessment of the end point of this rate-cutting cycle.