Goldman Sachs pencils in first Federal Reserve rate cut for Q2 of '24

Goldman Sachs Group economists anticipate the Federal Reserve will start lowering interest rates by the end of next June, with a gradual, quarterly pace of reductions from that point.

“The cuts in our forecast are driven by this desire to normalise the funds rate from a restrictive level once inflation is closer to target,” Goldman economists including Jan Hatzius and David Mericle wrote in a note dated Sunday.

For now, the Goldman team is penciling in rate cuts to begin in the second quarter of 2024. The rate-setting Federal Open Market Committee is expected to skip a hike next month, and conclude at the November meeting “that the core inflation trend has slowed enough to make a final hike unnecessary.”

“Normalisation is not a particularly urgent motivation for cutting, and for that reason we also see a significant risk that the FOMC will instead hold steady,” the Goldman economists wrote. “We are penciling in 25 basis points of cuts per quarter but are uncertain about the pace.”

Last week, data showed US inflation rose at a slower-than-expected headline rate of 3.2 per cent with the core consumer price index — which strips out energy and food costs — running at a 4.7 per cent  annual pace.

Fed policymakers in March 2022 began ramping up their target for the benchmark rate to a range of 5.25 per cent to 5.5 per cent.

“We expect the funds rate to eventually stabilise at 3-3.25 per ent,” Goldman’s team wrote.

However, Traders are betting that interest rates in the US will remain higher than inflation far into the future, driving the dollar to fresh highs against some of its major peers.

The 10-year real yield — or the rate after accounting for inflation — rose to 1.78 per cent on Monday, edging toward the highest level since 2009. The allure of positive returns is driving money back into greenback, which has extended a rally from a more than one-year low last month to around 3 per cent.

The rebound filtered across currency markets Monday, pushing the yuan toward the lowest level against the dollar this year. The yen slipped past 145 per dollar, nearing levels that forced the central bank to intervene last year.

The moves are being accentuated as hedge funds continue to trim their record short positions in the greenback. A barometer of market positioning and sentiment in the options market shows investors are the most bullish the currency since late March.