Goldman Sachs Expects Two 25bps Rate Cuts This Year Following Powell’s Remarks

Goldman Sachs strategists have reaffirmed their prediction of two additional 25 basis point (bp) rate cuts in 2024 after the recent speech by Federal Reserve Chair Jerome Powell.

Speaking at an event organized by the National Association for Business Economists, Powell indicated that the Federal Reserve does not feel rushed to lower rates quickly. He mentioned that any potential reductions in the federal funds rate will “play out over time.”

Powell referred to the September Summary of Economic Projections, stating that the baseline scenario includes “two more cuts,” but clarified that this does not imply larger cuts of 50 basis points. The timeline for these cuts will be determined by economic data, and the Federal Open Market Committee (FOMC) will adjust its approach based on what the data indicates.

Describing the economy as “strong,” Powell pointed to a recent update on national accounts, where a significant upward revision to gross domestic income (GDI) helped mitigate downside risks. He also noted that upward adjustments to the saving rate addressed concerns about the sustainability of consumer spending levels.

While Powell acknowledged that economic activity data have been less reliable in predicting downturns compared to labor market data, he asserted that there is currently no indication suggesting an imminent economic downturn.

On the subject of the labor market, Powell adopted a slightly more cautious tone. He explained that the projected increase in the unemployment rate is tied to expectations about job creation levels, which may not be sufficient to keep unemployment stable given labor supply assumptions. He also highlighted a notable decline in payroll job creation, referencing downward revisions in the growth figures from the Quarterly Census of Employment and Wages (QCEW) data.

Moreover, Powell reiterated the Fed’s belief that further cooling in labor market conditions is not necessary to achieve the target inflation rate of 2 percent.

In response to Powell’s comments, Goldman Sachs strategists stated they view these remarks as aligning with their forecast for 25 bp cuts in November and December. They emphasized that the decision between a 25 bp and a 50 bp cut in November remains a close consideration.

The Fed initiated its policy shift last month with a 50 bp rate cut, marking the first reduction since 2020.