Recent higher-than-expected inflation readings have prompted Goldman Sachs to adjust its 2024 interest rate forecasts. The bank now anticipates the Federal Reserve to implement three 25-basis point interest rate cuts this year, a reduction from its previous estimate of four rate cuts. This adjustment represents a significant shift from the market's initial expectations at the start of the year.
Goldman Sachs economist noted that while inflation has shown strength in recent months, the bank still foresees a decline leading up to the June FOMC meeting, which could prompt the first rate cut. However, uncertainties remain, with the inflation trajectory for the rest of the year falling within a range where minor surprises could yield substantial impacts.
The economist expects the Fed to target its initial rate cut in June, with the upcoming FOMC meeting likely indicating a leaning towards three interest rate cuts for the year. Despite this outlook, the primary risk to the forecast remains elevated inflation levels, which could potentially alter the Fed's course of action.
Recent inflation data has displayed a slight increase compared to previous months, with concerns emerging that inflation might persist above the Fed's long-term 2% target. The economist estimates a rise in core PCE of 0.45% in January and 0.29% in February, following an average of 0.16% in the latter half of 2023.
However, the economist remains optimistic that inflation will trend downwards later in the year, projecting year-over-year core PCE inflation to reach 2.4% by the Fed's June FOMC meeting. This anticipated decline should position the Fed for its initial interest rate cut.
Aside from interest rates, investor attention is expected to shift towards the Fed's balance sheet runoff plans. The bank foresees a reduction in the pace of Treasury runoff from $60 billion to $30 billion per month post its May meeting, with the runoff set to continue through the first quarter of 2025. By this point, the balance sheet is projected to be around $6.7 trillion or 23% of GDP.
