Final Fed Rate Hike Looms, But Top Wall Street Analyst Predicts A Year-Long Wait Before Rate Cuts

A major investment bank on Wall Street predicts the Fed will stop raising interest rates after its July meeting, but cautions investors not to anticipate a rate decrease in the near future.

According to Goldman Sachs, the upcoming rate hike at the Federal Reserve’s July meeting, pushing rates to 5.25%-5.5% is likely to be the last of the current cycle

The recent slowdown in core CPI inflation, which dipped more than expected to 4.8% in June, is seen as a crucial “turning point” in the inflation narrative by the bank’s U.S. economist David Mericle.

Economists at Goldman Sachs believe that as inflation declines, the majority of the board will ultimately support skipping a rate hike in September.

By the November meeting, Goldman Sachs anticipate core inflation will have further declined, leading the Federal Open Market Committee (FOMC) to consider a second hike unnecessary.

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Chart: U.S. Inflation Has Slowed Down Substantially Over the Last Year

….But Forget About Rate Cuts Anytime Soon

On the other hand, Goldman Sachs believes that rate cuts are not on the horizon anytime soon.

The bank projects that the Fed will maintain a more hawkish stance compared to market expectations, with the first rate cut potentially happening only in the second quarter of 2024.

Three factors underpin this view: the low likelihood of a U.S. economic recession, the high bar for rate cuts given the solid economy and tight labor market, and a gradual approach to cutting because fast cuts without a recession lack compelling rationale.

Goldman Sachs also acknowledges that even in the future, the FOMC might decide against rate cuts if the economy continues to perform above potential, unemployment rates reach historic lows and financial conditions ease further.

The bank assigns a meaningful probability (30%) to the scenario where no rate cuts occur next year.

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