Goldman Sachs increases forecast for Fed rate cut to three in 2025

Goldman Sachs on Monday raised its projection for US interest rates in 2025 to three-quarter-point cuts because of muted tariff effects and labor market weakness. 

The Wall Street brokerage expects rate cuts of 25 basis points each in September, October and December. It had earlier projected a single 25 bp rate cut this year. 

"We had previously thought that the peak summer tariff effects on monthly inflation and the recent large increases in some measures of household inflation expectations would make it overly awkward and controversial to cut sooner," analysts at Goldman wrote in a note. 

"Early evidence suggests that the tariff effects look a bit smaller than we expected," the analysts said, adding that disinflationary forces have been stronger than expected. 

Citigroup and Wells Fargo also expect the Fed to cut rates by 75 basis points in 2025, while UBS Global Research forecasts 100 basis points of reduction. All four brokerages say the cuts will begin in September. 

US President Donald Trump's administration slapped "reciprocal tariffs" on April 2 on key trading partners, but later paused the steep hikes. 

US consumer spending unexpectedly fell in May as the boost from the pre-emptive buying of goods like motor vehicles ahead of the tariffs faded, while monthly inflation increased only moderately. 

Goldman Sachs expects two more 25 bp rate cuts in 2026, pointing to a "terminal rate" of 3.00 per cent to 3.25 per cent, compared with its previous forecast of 3.50 per cent-3.75 per cent. 

The Fed's benchmark interest rate currently stands at 4.25 per cent-4.50 per cent. 

The US jobs report for June, due on Thursday, could reveal signs of a weakening labor market, potentially strengthening the case for earlier rate cuts. 

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