Goldman Sachs: "US Interest Rates to Hold Next Month... Cut in Q2 Next Year"

U.S. investment bank Goldman Sachs predicted on the 13th (local time) that the Federal Reserve (Fed) will implement its first benchmark interest rate cut in the second quarter of next year, followed by gradual cuts each quarter.

In an investor memo released that day, Goldman Sachs stated, "As inflation approaches the target level, rate cuts will be made driven by the desire to normalize rates at a limited level."

The Fed is set to hold the Federal Open Market Committee (FOMC) meeting in September. Goldman Sachs expects the Fed to skip a rate hike next month and conclude at the November FOMC that "the core inflation trend has slowed enough to make a final rate hike unnecessary."

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The U.S. Consumer Price Index (CPI) for July rose 3.2% year-on-year. Although the increase was larger than the previous month (3.0%), it fell short of experts' expectations (3.3%). The core CPI rose by 4.7%, down from 4.8% the previous month. Both CPI and core CPI increases were below market expectations, raising hopes for a rate hold at the September FOMC. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market sees a 90.0% chance that the Fed will keep rates steady at the current 5.25?5.5% level in September, up from 87.0% a week ago and 82.7% a month ago.

Goldman Sachs said, "(Rate) normalization is not an urgent motive for a cut, so there is a significant risk that the FOMC will maintain rates steadily," adding, "We expect a 25 basis point (1bp = 0.01 percentage point) cut each quarter, but the pace is uncertain." They further stated, "Ultimately, we expect rates to stabilize at around 3?3.25%."

While the market anticipates a soft landing for the U.S. economy, there is a forecast that the Fed will not cut rates until it becomes clear whether inflation control will succeed by next spring. Earlier, Fed Chair Jerome Powell warned right after the last rate hike last month, saying, "Bringing inflation back to 2% is a long process," and "Failing to properly address inflation now and not finishing this fight will be the worst outcome for everyone."

Neil Dutta, Chief Economist at Renaissance Macro Research, said, "Rising oil prices and high home prices pushing up rents could create a potential inflation boom," adding, "Without a late realization, it is impossible to know whether a soft landing will occur."