Goldman Sachs projects two Fed rate cuts next year with first in Q3

The Federal Reserve building in Washington, US Jan 26, 2022. REUTERS/Joshua Roberts/File photo

Goldman Sachs now projects two interest rate cuts by the U.S. Federal Reserve next year, advancing its expectation for the first cut to the third quarter, citing cooling inflation.

The brokerage had earlier predicted the Fed to begin cutting rates next December.

Two cuts would imply a Federal Funds Rate of 4.875 percent by the end of 2024, compared to its previous forecast of 5.13 percent.

While data on Friday showed a stronger-than-expected U.S. labor market, traders bet that the Fed will still proceed with interest-rate cuts next year amid declining prices. They expect the first cut to occur in March.

“Healthy growth and labor market data suggest that insurance cuts are not imminent… But the better inflation news does suggest that normalization cuts could come a bit earlier,” Goldman Sachs economist Jan Hatzius said in a note dated Dec. 10.

Inflation data last month showed U.S. consumer prices were unchanged in October as Americans paid less for gasoline, and the annual rise in underlying inflation was the smallest in two years.

Goldman Sachs believes some participants might “pencil in more cuts than before in response to the inflation news, but others might hold back to avoid encouraging the market to price too many cuts too soon.”

“Our own inflation forecast is a touch lower, but FOMC (Federal Open Market Committee) participants will likely still prefer to err on the side of being less optimistic,” adds Hatzius.