Sticky inflation causes
US Treasury yields hit highest in 4 months
U.S. investment bank (IB) Goldman Sachs has revised its forecast for the number of interest rate cuts by the U.S. Federal Reserve (Fed) this year from four to three. As persistent inflation continues to be confirmed, there is speculation that the Fed will delay the timing of monetary easing. Ahead of the Federal Open Market Committee (FOMC) meeting scheduled for the 19th-20th, the market is also beginning to anticipate that the timing of the rate cut could be pushed from June to July.
Jan Hatzius, an economist at Goldman Sachs, stated in an investor memo on the 17th (local time) that the Fed is expected to cut the benchmark interest rate by 0.25 percentage points three times in total this year, starting in June. This marks a further downward revision following last month's adjustment from five cuts to four cuts within the year.
Goldman Sachs maintained its previous forecast that the Fed will cut rates four times in 2025 and once in 2026, with the terminal rate reaching 3.25-3.5%.
Goldman Sachs cited somewhat elevated inflation as the reason for revising the rate cut forecast. Following last month's Consumer Price Index (CPI), the Producer Price Index (PPI) also exceeded market expectations for two consecutive months, confirming that the 'last mile'?the final stretch before reaching the inflation target?is quite challenging in the fight against inflation.
In the market, there is a growing view that the Fed's first rate cut may occur in July rather than June. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on that day priced in a 52.1% probability that the Fed will cut rates by 0.25 percentage points at the June FOMC meeting. This is down from 58.9% the previous day and 71.7% a week ago. There is also speculation that the number of rate cuts could be limited to two. A survey conducted by major foreign media and the University of Chicago Booth School of Business among economists found that more than two-thirds expect only two rate cuts this year. The most frequently cited timing for the first cut was between July and September.
Amid expectations of prolonged high interest rates, the yield on the two-year Treasury note, which is sensitive to monetary policy, has risen to around 4.749%, the highest level since late November last year.
Investor attention is focused on the March FOMC. While it is almost certain that the Fed will maintain the benchmark interest rate at the current 5.25-5.5% level, the key issue is the revision of the dot plot, which shows the interest rate outlook. Previously, at the December FOMC meeting last year, the Fed projected the median federal funds rate for this year to be 4.5-4.75%, anticipating three rate cuts of 0.25 percentage points each over the year. Whether the Fed will maintain the forecast of three rate cuts this year or revise it down to two is drawing attention.
Michael Contopoulos, Bond Director at Richard Bernstein Advisors, noted, "There is still too much liquidity in the market," adding, "Financial conditions are easing, credit is flowing freely, and the unemployment rate is too low. Speculation is rampant." He analyzed, "This is not a favorable environment for cutting interest rates."
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