Goldman Sachs no longer sees the Fed cutting interest rates this year
Lead — Goldman Sachs has shifted its expectation, now foreseeing no interest rate cuts by the Federal Reserve this year, pushing the first anticipated cut to June 2024. Per the full note source, the strong labor market and moderated unemployment projections contribute to this pivot. The desk interprets this development as significant amid current market positioning, especially given the recent non-farm payrolls data. With no high-impact events scheduled in the near term, traders should remain focused on macroeconomic indicators and their implications on rate expectations.
What the desk is arguing
Goldman Sachs has revised its forecast, now indicating that the Federal Reserve will not implement any rate cuts through 2023, with the first expected reduction postponed to June 2024. This marks a notable shift from their earlier outlook, where cuts were anticipated as early as December 2023. The desk frames this as a reaction to unexpectedly strong labor market performance, reflected in recent robust payroll figures.
The bank noted that stronger-than-expected job additions in May and a steady unemployment rate of 4.3% have prompted this adjustment, as they adjusted their unemployment projections slightly upward to only 4.4%. They also emphasize that core inflation pressures must remain subdued, pending the absorption of current geopolitical and supply chain challenges. The desk leans on this labor market resilience as a key driver for delayed rate adjustments.
In light of these developments, the desk is implicitly rejecting alternative interpretations that a cut may still occur this year due to persistent inflation or financial market stress. The current narrative emphasizes gradual normalization rather than aggressive easing.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Goldman Sachs now projects no Fed rate cuts in 2023, with potential cuts pushed to June 2024.
- 02Strong labor market data has influenced this shift in forecast, with an expected unemployment rate of 4.4%.
- 03This adjustment reflects broader economic views, shifting focus onto inflation metrics as the Fed's next critical benchmark.
Market implications
Traders should monitor labor market data closely, particularly upcoming employment reports, as these provide insight into Fed policy direction. A sustained unemployment rate below 4.5% could signal continued Fed caution regarding rate cuts.
Risks to this view
A significant reversal in economic indicators, such as a spike in unemployment or a sudden drop in consumer spending, could force the Fed to reconsider its stance. Additionally, unforeseen geopolitical events or stark shifts in inflation metrics may also impact rate expectations and necessitate a change in outlook.
For some context, Goldman Sachs had already pushed back their rate cut call from September to December last month here . But with their latest bump, they now expect the Fed not to cut rates at all this year with the first move set to follow only in June next year. "We are pushing the final two rate cuts in our Fed forecast back to June and December of 2027. The labour market has been stronger than we anticipated, and we now expect the unemployment rate to rise only a touch further to 4.4%, not enough to create a sense of urgency to lower rates.
As a result, we think the most natural path for the FOMC is to delay further cuts until the effects of tariffs, the war, and Al demand have faded and core PCE inflation nears 2%." In case you missed it, the US non-farm payrolls for May came in much hotter than expected with the jobless rate also holding steady at 4.3%. That gave markets a jolt on Friday last week but so far this week, there has been a lack of follow through. Circling back to Goldman Sachs' take on the Fed, they note that: "We continue to see rate hikes as unlikely, though somewhat more likely than we initially thought...We have left our terminal rate forecast at 3-3.25%, largely because the FOMC's longer-run dots have been stable over the past year and most participants envision further normalisation." This article was written by Justin Low at investinglive.com.
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