Markets Rattled as Goldman Sachs Revises Rate Cut Forecasts Amidst Fed Uncertainty

Markets Rattled as Goldman Sachs Revises Rate Cut Forecasts Amidst Fed Uncertainty 

The market quickly shifted its optimistic view on interest rate cuts following Powell's widely discussed change in stance in December. Initially, Powell indicated an end to rate hikes and even mentioned the possibility of rate cuts, prompting expectations of numerous cuts in 2024. However, just two weeks later, Powell stated it was too early to consider rate cuts, leading to a significant decrease in the expected number of cuts for 2024.

Goldman Sachs' forecasts for Federal Reserve actions also changed rapidly. Despite earlier predictions of a rate cut in May, they now believe it's unlikely to happen until later. 

They adjusted their forecast, anticipating rate cuts in June, July, September, and December, totaling four cuts in 2024, down from their previous prediction of five. Additionally, they now project four more cuts in 2025 instead of three, maintaining their estimate of the final interest rate.

While Goldman Sachs revised their expectations to delay the first rate cut, they balanced this by increasing the projected number of cuts in 2025, aiming to sustain the notion of a low final interest rate. 

The market had already adjusted somewhat, showing a slightly more cautious stance, with a reduced likelihood of a rate cut in June compared to earlier expectations.

Governor Waller's recent comments suggest a cautious approach to rate cuts, indicating a need for more inflation data before considering cuts. Other Fed officials also expressed reluctance to lower rates, emphasizing the need to wait for further economic indicators.

The Fed's changing perspective reflects a shift away from immediate rate cuts due to concerns about past rate hikes and a desire for more concrete evidence of inflation reaching target levels. Despite market speculation, Hatzius remains confident that rate cuts will not be driven by economic downturns but rather by technical adjustments to manage inflation.

As market dynamics evolve and inflation trends upward, questions arise about the feasibility of any rate cuts, especially considering record-high global markets and signs of price increases by small businesses. 

Speculation abounds regarding when Goldman Sachs may further revise its predictions, particularly in light of potential banking stability issues in mid-March.