Goldman Sachs' CEO revamps interest rate outlook before Fed decision

Views about the Federal Reserve’s interest-rate policy have shifted markedly this year.

Toward the start of 2024, investors expected six or seven rate cuts, as they looked for the economy and inflation to slow.

But that didn’t happen, and by April many experts, including the economist Torsten Slok of Apollo Global Management, predicted no rate reductions for this year.

More recently, shrinking inflation and some signs of economic deceleration have led many experts to predict one or two rate cuts for the rest of the year.

Interest-rate futures indicate a 100% chance the Fed will trim rates by September, according to CME FedWatch. The probability is only 4.1% for a rate reduction at this week’s Fed meeting.

Futures signal a 98.3% chance of at least two rate cuts by December, with a 65.3% probability of at least three decreases.

The question: Should the Fed cut rates now?

Some contrarian voices on what the Fed should and will do are out there.

Former New York Fed President Bill Dudley had thought for some time that the Fed should leave rates higher for longer. But he has changed his tune and says the central bank should act this week. “The facts have changed,” he wrote on Bloomberg .

Looking back, “for years, the persistent strength of the U.S. economy suggested that the Fed wasn’t doing enough to slow things down,” Dudley said. But the central bank boosted rates 11 times from March 2022 to July 2023.

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“Now, the Fed’s efforts to cool the economy are having a visible effect,” he said. Consumption, housing and hiring are slowing. The unemployment rate registered 4.1% in June, up from 3.7% in December.

Combine all that with slowing inflation and you get Dudley’s call for a rate decrease now. Consumer-price inflation slid to 3% in June from 3.3% in May.

“Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk,” he said.

The views of Vanguard and Goldman Sachs

Vanguard economists see it differently. They predict no Fed action through year-end.

“Continued economic growth, labor momentum, and stubborn inflation are likely to leave the Fed without the confidence it needs to cut interest rates this year,” they wrote in a commentary.

Related: Vanguard offers unexpected Fed interest rate forecast

But that’s not a slam dunk, they said. “Continued favorable inflation readings would likely allow for a rate cut, with September as the most likely timing,” they explained.

“Still, we believe it would be difficult for the Fed to cut its policy rate more than once in 2024. We assign a low probability to inflation reaccelerating enough to warrant a further rate increase.”

Goldman Sachs Chief Executive Officer David Solomon, meanwhile, is more dovish.

Two months ago, he forecast no rate cuts for this year. He now sees things differently.

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“One or two cuts in the fall seems more likely,” he told CNBC . “There’s no question there are some shifts in consumer behavior. And the cumulative impact of what’s been kind of a long inflationary pressure, even though it’s moderating, is having an effect on consumer habits.”

Consumer spending rose 0.2% inflation-adjusted in June.

The official projection from Goldman Sachs economists calls for a rate cut in September and another in the fourth quarter.

Interest rates have a strong impact on consumers and investors, of course. Lower rates mean less income from bonds, money-market funds, and bank accounts. But they also mean lower payments on mortgage, auto, and credit card loans.

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