Goldman: "Fed to Cut Interest Rates in March... Five Times This Year"

Although expectations for an early interest rate cut by the U.S. Federal Reserve (Fed) have somewhat diminished recently, investment bank Goldman Sachs has reaffirmed its stance that the first rate cut could occur in March. It is anticipated that a total of five rate cuts will be implemented this year.

Jan Hatzius, Chief Economist at Goldman Sachs, stated on the 9th (local time) during a webinar titled "Beyond a Soft Landing: The Global Economy in 2024," hosted by the think tank Atlantic Council, "Our baseline forecast is that the first 0.25 percentage point cut will take place in March, followed by a total of five rate cuts by the end of the year."

Accordingly, the current U.S. benchmark interest rate of 5.25?5.5% is expected to be lowered to 4.0?4.25% through five rate cuts this year, and further reduced to 3.25?3.5% with three additional cuts next year. Hatzius explained, "The driving force behind this is that inflation is returning to the 2% price stability target," adding, "Fed Chair Jerome Powell also indicated in a press conference that even if economic growth is maintained, they want to normalize rates before inflation reaches 2%."

The core Personal Consumption Expenditures (PCE) price index, which the Fed closely monitors, recorded a 3.2% increase in November last year. Although this still exceeds the 2% target, Hatzius forecasted that this figure will drop to 2.2% by the second quarter. He noted, "It is clearly not by the end of January," but added, "March is a reasonable timeframe for them to start (rate cuts). May is also possible, but since the economy is still growing rapidly, under all forecasts, March seems more likely." The Federal Open Market Committee (FOMC) meeting where the first rate decision of the year will be discussed is scheduled for January 30?31.

These remarks stand out amid growing caution that rate cuts may not happen as quickly as recent market expectations suggested. According to the Chicago Mercantile Exchange (CME) FedWatch, the futures market currently prices in about a 64% chance that the Fed will cut rates by at least 0.25 percentage points in March. However, this is a decline from about 90% a week ago. Stronger-than-expected economic indicators, such as employment data, have added weight to concerns that market optimism was excessive.

On the same day, Hatzius also confirmed that Goldman Sachs is forecasting a soft landing for the U.S. economy. He said, "We cannot find sufficient evidence to predict a recession or below-trend growth," and explained, "Inflation has dropped significantly, and solid fiscal conditions will be neutral or slightly positive in terms of growth shocks."

Currently, Goldman Sachs has maintained a 15% probability of a U.S. recession since September last year, which aligns with the long-term average. This is a significant decrease compared to just one year ago, when Goldman Sachs estimated a 35% chance of recession and Wall Street insiders mentioned probabilities as high as 65%. Regarding the 15% figure, he said, "It leaves room for shocks that can be described as exogenous or unknown," cautioning about geopolitical risks such as the potential escalation in the Middle East.

Regarding the economic impact of the U.S. presidential election scheduled for November, he said, "It is not something to be ignored," but added, "I think it will affect the market and sentiment to some extent, but generally, the election's impact will be an issue in 2025 rather than this year." He explained that the key will be what changes occur in trade and fiscal policy after the election.

Additionally, Hatzius identified April as the timing for the European Central Bank's (ECB) first rate cut. He said, "The ECB will want to start cutting rates later than the Fed," and assessed that since Europe's real economy has weakened, the pace of rate cuts afterward could be faster. For the Bank of England (BOE), he mentioned May as the timing for the first rate cut. In the case of China, even if additional easing measures are implemented, they are not expected to be sufficient to reverse economic growth.