Last week, the Federal Reserve lowered its expected interest rate cut for the year to once at its June meeting. However, economists at Goldman Sachs do not seem to buy it and still expect the Federal Reserve to cut interest rates twice this year.
Economists, including Jan Hatzius, wrote in their latest report that although the Federal Reserve's forecast last week was "unexpectedly tough," "we are satisfied with the forecast of two rate cuts (in September and December)."
Goldman Sachs' forecast is consistent with market expectations: data from the CME Federal Reserve observation tool shows that the market generally predicts that the Federal Reserve will cut interest rates twice in September and December, respectively.
Since the beginning of this year, due to fluctuations in inflation, the Federal Reserve has also struggled to cut interest rates as desired. After the latest "dot matrix" released last week saw a significant cut in interest rate expectations, Federal Reserve officials have also responded to their latest predictions with a series of "hawking".
For example, Philadelphia Fed Chairman Huck stated on Monday that based on current forecasts, he believes a rate cut this year is appropriate and hopes to see more data progress.
He pointed out that there were indeed some "bumps" in the inflation trend at the beginning of the year, and the recent inflation report showed that the Consumer Price Index (CPI) had declined in May, which was "very popular" and also proved that although the progress in fighting inflation was slow, fortunately there was no "resurgence". However, he still hopes to see more data.
Since the beginning of this year, Goldman Sachs has also repeatedly revised its forecast: reducing interest rates from the initial three cuts to two, and last month the bank postponed its first cut forecast from July to September. But so far, the bank still believes that there will be two interest rate cuts within the year.
There are three reasons for this
Firstly, Goldman Sachs economists argue that the US labor market is at a turning point, and any further weakening of labor demand will affect employment, not just job vacancies.
The report states that the strength of labor demand is currently unclear, and in stark contrast to healthy non-agricultural employment data, the number of initial and continuing claims for unemployment benefits has been increasing in recent weeks.
"Ultimately, the key driving factor for labor demand is economic activity, and GDP growth has significantly slowed down," they wrote.
Secondly, Hatzius stated that the surge in inflation in the first quarter may be an "abnormal phenomenon", with reports for the rest of this year showing that core commodity prices remain stable, while housing and non housing core service inflation will gradually slow down.
Finally, regarding the outlook for economic growth, Goldman Sachs pointed out that the recent slowdown in the economy is likely to continue.
"Real income growth has slowed down, and consumer confidence has once again declined. There are preliminary signs that increased uncertainty related to elections may drag down corporate investment in the coming months.".