Goldman Sachs Predicts 75 Basis Points in Fed Rate Cuts by December

Goldman Sachs has revised its forecast for the Federal Reserve's interest rate cuts, predicting that the first quarter-point reduction will occur in September. This adjustment is part of a broader revision to the firm's 2025 outlook, which now includes three 25 basis point cuts scheduled for September, October, and December. These cuts are anticipated to lower the federal funds rate to a range of 3.50% to 3.75%.

The rationale behind Goldman Sachs' revised forecast is multifaceted. The firm cites moderating economic growth and elevated borrowing costs as key factors that could compel the Federal Reserve to ease monetary policy. Additionally, the firm notes that while inflation has shown signs of easing, the Fed remains cautious about the potential impact of tariffs, which it views as stagflationary. This caution is reflected in the Fed's stance, with Chair Jerome Powell emphasizing the need to "wait and see" how tariffs affect the economy before making further policy moves.

Goldman Sachs' forecast shift could drive market volatility, with implications for both crypto and traditional assets. Affected markets may include those involved in risk-on investing, including major cryptocurrencies and DeFi protocols. Immediate economic implications may include increased liquidity in traditional and digital markets. Lower interest rates typically favor risk-on assets, pushing capital flows into sectors such as cryptocurrencies. This could lead to potential market shifts.

Cryptocurrency markets may become bullish, promoting investments in Bitcoin, Ethereum, and DeFi tokens. Commodities and traditional assets might see decreased yields, impacting investor behavior. Financial markets often react strongly to changes in monetary policy. Potential outcomes could include increased trading volumes and liquidity shifts towards decentralized finance. Historical data aligns rate cuts with heightened volatility and crypto market rallies. Such economic climates benefit risk-on investments, enhancing capital influxes.

The market's reaction to these predictions has been nuanced. While some analysts and traders have adjusted their expectations in line with Goldman Sachs' revised forecast, others remain cautious. For instance, Apollo expects only one rate cut in 2025, while JPMorgan strategists forecast two. The prediction market Kalshi currently sees two cuts as the most likely scenario, reflecting a degree of uncertainty among market participants.

Despite the varying outlooks, there is a consensus that policy risk and portfolio resilience will be defining factors for the remainder of the year. Goldman Sachs strategists have highlighted that while markets may overlook emerging weaknesses in hard data, any evidence of trade tensions affecting hiring or causing a rise in unemployment could pose significant downside risks. This could potentially reignite recession fears and weigh on risk assets.

In summary, Goldman Sachs' prediction of a September rate cut by the Federal Reserve is based on a combination of moderating economic growth, elevated borrowing costs, and the potential impact of tariffs. While the market's reaction has been mixed, the firm's forecast underscores the importance of policy risk and portfolio resilience in the current economic environment.