Goldman Sachs economists including David Mericle and Jan Hatzius say the Federal Open Market Committee (FOMC) should initiate rate cuts in the second quarter of 2024.
The central bank's decision is expected to align with a period when core PCE inflation, the Federal Reserve's favored measure of inflation, drops below 3% year-on-year and falls below 2.5% on a monthly annualized basis.
The rationale for this action is to restore the funds rate from a restrictive level back to a more neutral stance as inflation approaches the Fed's target.
Goldman Sachs Sees Uncertain Path For Rate Cuts
The specific rate cut cycle being considered by Goldman Sachs
"The FOMC might not cut because inflation might not fall enough or, even if it does, because solid growth, a tight labor market, and a further easing of financial conditions might make cutting seem like an unnecessary risk," the Goldman Sachs analysts wrote.
The expectation is that the funds rate will eventually stabilize within the range of 3-3.25%, surpassing the FOMC's median longer-run projection of 2.5%.
Economists at Goldman Sachs assert that the neutral rate is currently higher than it was in the previous cycle, and also greater than what is commonly expected. They believe that the increase may be attributed to the growth in fiscal deficits.
Fed On Hold In September
In the short term, it is anticipated that the FOMC will abstain from a rate hike during the September meeting.
The final decision, which is likely to be made in November, hinges on whether the core inflation trend has decelerated sufficiently to render an additional hike unnecessary.
Going forward, Goldman highlights that there is not a pressing urgency for the Fed to normalize rates, leading to a significant risk that the FOMC may opt to maintain the status quo.
Goldman Sachs' views have consistently leaned toward a more hawkish stance this year compared to prevailing market expectations. This divergence arises from a perceived lower likelihood of a recession compared to consensus views, coupled with a relatively high threshold for implementing rate cuts.
