Goldman Sachs Reaffirms September Rate Cut Forecast, Downplays Fed's 'Hawkish Surprise'

Goldman Sachs has reiterated its forecast for two interest rate cuts in 2024, commencing in September, following the Federal Open Market Committee’s (FOMC) June meeting.

Despite the Federal Reserve’s June dot plot presenting “a hawkish surprise” with a median projection of just one cut in 2024, contrary to market expectations of two, Goldman Sachs economist David Mericle believes this does not rule out a September cut. 

Cumulative Progress On Inflation

Mericle highlighted that Powell noted the cumulative progress on inflation, which has fallen from a peak of 7% to 2.7%.

The FOMC revised its statement to acknowledge “modest” progress toward the 2% target, a shift from the previous language indicating “a lack of” progress. Powell’s remarks reinforced the Fed’s recognition of ongoing improvements in inflation data.

On Thursday, the Bureau of Labor Statistics reported the lowest monthly inflation rate in eight months for the Producer Price Index, which tumbled 0.2% from April 2024 to May 2024, well below expectations.

Read also: Ice Cold Producer Inflation Data Sparks Economist Reactions: ‘More Data In The Correct Direction’

Traders Align With A Two-Cut Scenario

Following the FOMC meeting, market participants now assign a 64% probability to a rate cut in September and factor in cumulative 52 basis points of cuts by year-end, implying two fully priced rate cuts.

This increased optimism towards the likelihood for rate cuts pushed bond yields down and major U.S. equity indices to hit record highs on Thursday.

Long-dated Treasury bonds, as tracked by the iShares 20+ Year Treasury Bond ETF TLT, are up over 2% for the week, eyeing the strongest performing week since January.

Mericle stated that if the next three rounds of inflation data align with recent trends, the Fed is likely to proceed with a rate cut.

According to Goldman Sachs, Powell made three significant comments during his press conference:

1. Labor Market Conditions: Powell indicated that labor market data would need to be worse than the FOMC’s current expectations to strengthen the case for a rate cut. This comes after slight increases in the FOMC’s unemployment rate projections for 2025 (4.2%) and 2026 (4.1%).
2. Neutral Rate Estimates: Powell downplayed the relevance of neutral rate estimates for near-term monetary policy decisions. The median longer-run or neutral rate dot increased to 2.75%, with three participants adjusting their estimates higher. However, Powell emphasized that the neutral rate is a “theoretical” long-run concept that doesn’t guide near-term policy decisions.
3. Framework Review: Powell mentioned that the next framework review would begin later this year, potentially covering the Fed’s communications strategy and other topics.

Read now: How May’s Inflation Slowdown Could Influence Fed’s Next Move: Insights From 6 Economists

Image generated using artificial intelligence via Midjourney.