Goldman Sachs Expects 75 Basis Points Rate Cuts by Year End

Goldman Sachs has revised its forecast for the US Federal Reserve's interest rate cuts, now expecting the first reduction to occur in September rather than December. This change is influenced by the limited inflationary impact of customs duties, which was more constrained than initially anticipated. The economic team at Goldman Sachs, led by Chief Economist Jan Hatzius, highlighted that the probability of a September rate cut is above 50%, driven by factors such as weaker tariffs, larger disinflationary cushions, and potential labor market softening or volatility concerns.

The bank anticipates three interest rate cuts of 25 basis points each by the end of the year, scheduled for September, October, and December. Consequently, Goldman Sachs has lowered its final interest rate expectation to a range of 3-3.25%, down from the previous forecast of 3.5-3.75%. The analysts noted that if the Fed's rate cuts are motivated by an insurance policy, the most likely scenario would involve consecutive cuts, similar to the approach taken in 2019. However, a rate cut in July is not expected unless employment data released this week shows significant weakness.

Goldman Sachs' assessment of the labor market indicates that while it remains healthy, job-seeking has become more challenging. The bank also pointed out potential downside risks to employment data due to seasonal effects and changes in immigration policy. The revised forecast by Goldman Sachs reflects the evolving economic landscape and the need for the Fed to balance supporting economic growth with managing inflation. As economic conditions continue to shift, the Fed's decisions will be closely monitored by investors and policymakers, underscoring the importance of flexible and responsive monetary policy.