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Goldman Sachs predicts FED rate cuts amid economic and market shifts


Goldman Sachs predicts FED rate cuts, financial news

Goldman Sachs' chief economist, Jan Hatzius, has made a significant prediction regarding the monetary policy of the Federal Reserve. He anticipates that the central bank will execute three reductions in interest rates throughout the current year. This projection stands in stark contrast to the perspectives shared by several Federal Reserve officials. A notable example is Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis. Kashkari has implied that a reduction in interest rates might not be forthcoming, particularly if the inflation rate continues to hover at elevated levels. This divergence in viewpoints highlights the complexity and uncertainty surrounding the future course of monetary policy in the United States.


Jan Hatzius presents an optimistic view of the United States' economic trajectory. According to his analysis, the U.S. economy is poised to attain a near 3% rate of growth for this year, which surpasses the general consensus among economists and analysts. This rate of growth is notably higher than expected and substantially diminishes the chances of a recession occurring within the next 12 months. Hatzius estimates this likelihood at merely 15%, aligning it with the average historical probabilities of recession occurrence. This positive outlook on economic growth reflects confidence in the underlying strength and resilience of the U.S. economy despite various global and domestic challenges.



Regarding inflation, Hatzius extends his optimistic outlook. He forecasts that the Personal Consumption Expenditures (PCE) price index, which is a measure of inflation favored by the Federal Reserve that excludes volatile food and energy prices, will decrease to 2.4% by the end of 2024. This rate is significantly closer to the Federal Reserve's long-term inflation target of 2%. Hatzius expects that this target will be achieved in the following year. Such a decline in the PCE index would indicate a substantial cooling of inflationary pressures, which have been a major concern for the economy.


This expected decrease in inflation could serve as a rationale for the Federal Reserve to proceed with the predicted interest rate cuts, even in the face of ongoing market uncertainties and despite the Fed's recent decisions to maintain its current monetary policy stance.



In a recent event that merits attention, Jerome Powell, the Chairman of the Federal Reserve, spoke at the Federal Reserve branch in San Francisco. In his address, he underscored the central bank's cautious approach towards adjusting interest rates. Powell highlighted that the Federal Reserve is not inclined to implement immediate reductions in interest rates.


This stance of caution reflects the Fed's consideration of various economic indicators and uncertainties before making any decisive moves on monetary policy. Powell's comments are particularly relevant as they provide insights into the current thinking within the Federal Reserve, suggesting a careful balancing act between fostering economic growth and controlling inflation.


Market participants, who are meticulously monitoring every move of the Federal Reserve, are currently assessing the likelihood of changes in interest rates. Based on the latest observations and financial tools, such as the CME FedWatch Tool, there is almost a 94% probability that the Federal Reserve will maintain the current interest rates at their upcoming meeting in May.



However, there is growing speculation and a significant chance that the first of the anticipated rate cuts could occur as soon as June. This expectation is grounded in recent economic developments and market trends, indicating a keen market anticipation of how the Federal Reserve will navigate the complex economic landscape.


Finally, the exchange rate between the Euro and the U.S. Dollar, a critical indicator in the foreign exchange markets, has been relatively stable, fluctuating within a narrow band between 1.0500 and 1.1000 over the past few months. Goldman Sachs analysts project that this stable trend is likely to persist in the immediate future.


However, they also note that a significant shift in either the economic or political environment could lead to a decisive breakout in the exchange rate in one direction or another. This stability in the EUR/USD exchange rate is closely watched by traders and analysts as it reflects broader economic trends and policy decisions made by central banks in both Europe and the United States.



Additionally, the analysts suggest that factors such as a notable divergence in monetary policy between the European Central Bank and the Federal Reserve or a convergence in the economic cycles of the Eurozone and the United States could be pivotal in driving significant movement in the EUR/USD exchange rate.


In summary, the past week was particularly eventful for the U.S. dollar, characterized by significant volatility. The currency experienced a notable decline, dropping from a high not seen in five months to its lowest level in two weeks. This shift was largely attributed to an unexpected slowdown in the growth of the service sector in the United States.


This economic development fueled market speculations and expectations that the Federal Reserve might be more inclined to lower interest rates in the near future. This change in market sentiment reflects the dynamic nature of financial markets and the sensitivity of currency values to both anticipated and actual changes in economic indicators and central bank policies.


07.04.2024



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