As inflation eases, the Federal Reserve will cut rates, according to a Goldman Sachs report.
Goldman Sachs predicts that rate cut relief won’t come until the second quarter of next year as the Federal Reserve scrambles to tame inflation despite worries that the US economy is growing increasingly wobbly.
The first cut from the Fed — which could come May 2024 — is likely to be 0.25 percentage points, but the pace of rates cuts after that remains unclear, according to a report Sunday led by the bank’s chief economist Jan Hatzius.
The report notes Fed Chair Jerome Powell will likely err on the side of caution and make sure inflation has abated before enacting additional cuts.
“Fed officials will want to minimize the risk that they could regret cutting if inflation stays too high,” the report notes.
The Fed’s current benchmark interest rate is is between 5.25% and 5.5% — the highest level in more than two decades.
The prolonged high rates have prompted investors to worry that the aggressive rate hikes could push the economy into a recession.
But the report notes the Fed’s primary concern is still inflation — and isn’t factoring a potential recession into their decision to cut rates.
“The cuts in our forecast are driven by this desire to normalize the funds rate from a restrictive level once inflation is closer to target, not by a recession,” the report states.
According to the most recent CPI report, inflation was 3.2% in July.
While that number is a dramatic decrease from inflation’s high water mark of 9.1% in June 2022, it’s still not at the Fed’s targeted inflation rate of 2%.
“When, people are writing down rate cuts next year, it just is a sense that inflation is coming down, and we’re comfortable that it’s coming down, and it’s time to start cutting rates,” Powell said in a press conference last month.
While Powell acknowledged inflation is headed in the right direction, he also added that its too soon to know what will happen.
“But I mean, there’s a lot of uncertainty between what happens in the next meeting cycle, let alone the next year, let alone the year after that,” he added.