Federal Reserve Preview: Goldman Sachs Says Rate Hikes Finished, Hints At Possible 'Insurance Cuts' In 2024

Traders are gearing up for the two-day Federal Open Market Committee meeting set to commence on Tuesday and conclude with a critical interest rate decision and highly anticipated press conference by Federal Reserve Chair Jerome Powell on Wednesday.

Market sentiment is leaning heavily toward the belief the current interest rate of 5.25%-5.5% will remain untouched. CME Group’s FedWatch tool is showing a staggering 98% probability of rates staying on hold. Looking ahead to December, market participants are slightly less confident, but still assign a robust 75% probability to the Fed maintaining the status quo.

Goldman Sachs Sees No Hikes Going Forward, Rising Focus On ‘Insurance Cuts’

A rate hike is not on the agenda for the November Fed meeting, according to Goldman Sachs economist David Mericle.

The FOMC seems to agree that recent financial tightening, mainly due to rising long-term Treasury yields, makes another rate hike unnecessary, according to Goldman Sachs.

The 10-year Treasury note — which is tracked through the US Treasury 10 Year Note ETF UTEN — has recently surged to levels unseen since 2007, sparking interest even among hedge fund investors like Bill Ackman.

Although Powell hasn’t ruled out the chance of further tightening in the future, Goldman Sachs expects fourth-quarter GDP growth to slow to 1.6%. This forecast considers factors like tighter financial conditions and the restart of student loan payments, assuming there is no government shutdown.

The pressing issue, Mericle said, is the potential scenario of the FOMC postponing rate hikes in December. This delay could shift attention toward the possibility of rate cuts. Based on Goldman Sachs’ projections, the first rate cut could materialize in the fourth quarter 2024, as core PCE inflation is forecasted to dip below 2.5% year-on-year.

While Goldman Sachs’ outlook does not foresee major macroeconomic shocks in 2024, the possibility of “insurance cuts” at some point should not catch the market by surprise, Mericle said.

In the past, the FOMC showed a tendency to make more cautious shifts in response to worries about economic growth, the economist said. For instance, in 2016, the committee decided to forgo three expected rate hikes due to a slowdown in manufacturing. Similarly, in 2019, the Fed enacted three rate cuts in response to risks associated with the trade war. Importantly, these actions were taken without an imminent recession looming on the horizon.

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Photo courtesy of the Federal Reserve.