REUTERS/Andrew Kelly
- The Fed's most aggressive policy-tightening cycle since the 1980s has seen interest rates rise from near-zero to over 5%.
- Goldman Sachs sees the central bank holding interest rates high until at least mid-2024.
- Economists at the Wall Street bank believe the Fed may not rush to stimulate an already-strong economy.
Goldman Sachs economists don't expect the Federal Reserve to start cutting interest rates until at least mid-2024, and predict the central bank will introduce steady quarter-point reductions from that point onward.
The Fed's most aggressive monetary-tightening campaign since the 1980s saw interest rates rise from near zero to over 5% since last spring, in efforts to combat rampant inflation in the economy.
And though Goldman sees rate cuts as the natural next step in the Fed's policymaking, its economists don't see this happening before at least the end of the second-quarter of 2024 – later than the market consensus.
In a note published at the weekend, Goldman economists Jan Hatzius and David Mericle explained the reasoning behind their predictions.
"Normalization is not a particularly urgent motivation for cutting, and for that reason we also see a significant risk that the FOMC will instead hold steady," they wrote.
"The FOMC might not cut because inflation might not fall enough or, even if it does, because solid growth, a tight labor market, and a further easing of financial conditions might make cutting seem like an unnecessary risk."
Their view is more cautious compared with the market consensus. The CME FedWatch Tool, which captures interest-rate expectations implied by money-market prices, projects the Fed Funds Rate to maintain its current range of 5.25% to 5.50% until March 2024, when it may be lowered by 25 basis points.
But the Goldman economists believe the rate cut will come later than this, as the Fed may not rush to stimulate an already-strong economy.
"We do not see a strong need to cut and consequently we think there is a significant risk that the FOMC will instead hold steady," Mericle wrote.
The stock market has largely ignored the central bank's hawkish actions this year, rallying thanks to investor excitement around artificial intelligence.
After a dismal 2022 where stock prices cratered as the Fed began to hike borrowing costs, the S&P 500 has jumped nearly 18% year-to-date, and powered higher by the rise of AI, cooling inflation, and dwindling recession odds.