Goldman Sachs Moves Fed Rate Cut Prediction to September

Goldman Sachs has advanced its prediction for the Federal Reserve's interest rate cuts, now anticipating that the central bank will initiate reductions in September rather than December. This shift is attributed to the observation that the inflationary impact of tariffs appears to be less significant than initially expected. The bank forecasts that the Federal Reserve will lower rates by 25 basis points during its meetings in September, October, and December, adjusting the terminal rate forecast from the previous range of 3.5% to 3.75% down to 3% to 3.25%.

The economic team at the bank suggests that the probability of a rate cut in September is slightly above 50%, citing multiple pathways to achieve this goal. These include minimal tariff impacts, stronger deflationary forces, genuine labor market weakness, or market panic due to monthly fluctuations. The team speculates that the Federal Reserve leadership shares their view that tariffs will have a one-time effect on price levels.

Analysts from the bank note that if there is any insurance motive for rate cuts, the most natural approach would be to implement them in consecutive meetings, similar to the strategy employed in 2019. They do not anticipate a rate cut in July unless the upcoming employment data significantly misses expectations. The bank also highlights that the labor market remains healthy, with job searches becoming increasingly challenging due to seasonal factors and changes in immigration policies, which pose short-term risks to employment numbers.

Concurrently, market expectations for Federal Reserve rate cuts have intensified. Earlier this month, some investors saw virtually no chance of a rate cut in July, but now they assign a one-in-five probability to this event, with a rate cut in September almost certain. This shift in market sentiment reflects growing concerns about the economic outlook and the potential need for monetary policy accommodation.

The revised forecast from Goldman Sachs underscores the delicate balance the Federal Reserve must strike in navigating the current economic environment. The central bank faces pressures to lower interest rates to support economic growth amidst trade tensions and their potential inflationary effects. However, the Fed must also weigh the risks of moving too quickly, including the possibility of overheating the economy or inflating asset bubbles. The upcoming Federal Open Market Committee meeting in July will provide further insights into the central bank's plans for the remainder of the year.