Goldman Sachs has moved its prediction for the first Federal Reserve interest rate cut from March to May. This adjustment comes in the wake of the January Federal Open Market Committee (FOMC) meeting, which was marked by Fed Chair Jerome Powell‘s apparent unwavering stance on monetary policy.
David Mericle, an economist at Goldman Sachs, highlighted that Powell gave a strong signal that a March funds rate cut “is probably not the most likely case.”
Mericle explained that the consensus among FOMC members, despite their varying perspectives, seems now to lean towards initiating rate cuts a bit later than previously anticipated, likely in May rather than March.
Powell’s Hawkish Hint
This realignment of expectations follows Powell’s notably hawkish press conference, where he underscored the importance of gaining further assurance on the trajectory towards the 2% inflation target before considering rate reductions.
"Based on the meeting today, I would tell you that I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that," the Chair stated.
Powell’s remarks at the press conference were clear: a single achievement of the 2% inflation target would not suffice. Instead, the Fed seeks sustained stability at this level before enacting any rate cuts. This cautious approach signals a more ‘hawkish’ outlook than many anticipated, prompting a reassessment of the timing for easing monetary policy.
Following Powell’s remarks, Wall Street extended losses for the session and the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, marked its worst trading day since September 2023. The tech-heavy Nasdaq 100, monitored through the Invesco QQQ Trust QQQ, even underperformed, tumbling 1.94% on Wednesday, on its worst session since late October 2023.
Adjusting Expectations, But Keeping A Dovish Stance
Goldman Sachs had positioned itself in the camp expecting a rate cut as early as March. Mericle had previously argued that the Fed would keep open the possibility of a March reduction, contingent on forthcoming inflation data and without firmly committing by altering its statement’s language.
The recent pivot to a May timeline, however, does not alter Goldman Sachs’ overall forecast of monetary easing, with the expectation of five rate cuts in 2024 and an additional three in 2025 still standing.
Mericle now anticipates a series of four successive rate cuts during the meetings in May, June, July, and September, followed by a concluding cut in December. Additionally, the March meeting is expected to pave the way for discussions on reducing the pace of the balance sheet runoff, with a formal decision and implementation to follow in May.
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