With a series of US economic data that exceeded expectations this Monday, expectations of the Federal Reserve's interest rate cut were thrown more cold water, and Goldman Sachs, a major Wall Street bank whose “predictions have always changed,” is also busy “tearing up” the report again...

Goldman Sachs economists once again adjusted their forecast for the Fed's initial drop window on Friday — the latest forecast is that the Fed will not start cutting interest rates until September of this year; the previous forecast was July. Goldman Sachs believes that since the US economy is still resilient, the reason for easing monetary policy is still unfounded.

“Earlier this week, we noticed that Fed officials said that the July rate cut may require not only better inflation data, but also substantial signs of weakness in economic activity or labor market data,” Goldman Sachs economists, including Jan Hatzius, wrote in a report.

It is worth mentioning that the last time the Goldman Sachs economists' team adjusted their expectations for the Federal Reserve's interest rate cut path during the year was last month, which is not too far away. At the time, they lowered their estimate of the number of times the Fed would cut interest rates during the year from three to two, and believed that these two interest rate cuts would occur in July and November, respectively.

Currently, although the forecast for the first drop window has been postponed, Goldman Sachs still anticipates that by the end of 2024, the Federal Reserve will cut interest rates twice in total — an average of once every quarter or every other meeting. This means that if things unfold as predicted by its economists, the Federal Reserve's second rate cut will occur in December.

Judging from the latest US macroeconomic fundamentals data, it is actually not surprising that Goldman Sachs will choose to further adjust its forecast for the Fed's interest rate path this week.

As mentioned in our report a few days ago, the minutes of the latest meeting released by the Federal Reserve this Wednesday “made a big mistake” — although Federal Reserve Chairman Powell vowed at the post-meeting press conference, it is unlikely that the Fed's next move would be to raise interest rates. However, the newly revealed details of the meeting minutes revealed that Powell's “dovish” statement at the time probably largely covered up the voices of hawkish officials.

This hawkish report shows that “many” Federal Reserve officials questioned whether the restrictive nature of the policy was enough to reduce the inflation rate to the target level, and many officials mentioned their intention to further tighten the policy if necessary.

After the release of the Federal Reserve minutes, the market's expectations that the Fed would cut interest rates twice during the year quickly cooled down. And with the release of a brand-new series of hot US data this Thursday, the wind direction began to change even more drastically. According to data released by S&P Global on the same day, the S&P Global US Composite PMI Index rose more than 3 points to 54.4 in May, the highest level since April 2022. The rise in this PMI indicator indicates that overall economic activity in the US will continue to accelerate further after entering the middle of the second quarter.

In a recent public appearance this week, Goldman Sachs CEO David Solomon was even more hawkish than the bank's economists, saying he didn't think the Fed would cut interest rates any this year.

Overview of all the latest Wall Street predictions in one map

In fact, judging from the latest pricing in the interest rate swap market, even though Goldman Sachs has now postponed the Federal Reserve's first drop forecast until September, it is still much earlier than the general predictions of traders in the market. So in a sense — if Goldman Sachs revises its forecast again soon, investors probably won't have to be too surprised.

According to the pricing in the swap market, the first US Federal Reserve interest rate cut, which is currently fully priced, will be at the end of the year in December. The probability that interest rates will be cut twice throughout the year is less than 30%, which is significantly smaller than the probability of about 70% last week.

In addition to Goldman Sachs, earlier this week, Nomura also postponed expectations of the Fed's first drop from July to September, and expected the Fed to cut interest rates only twice during the year.

According to the following table summary by famous journalist Nick Timiraos, known as the “New Federal Reserve News Agency,” there are currently only a few institutions such as J.P. Morgan Chase and Citigroup, which still insist that the Federal Reserve will start cutting interest rates in July. Most Wall Street investment banks' predictions for the first fall of the Federal Reserve have focused on September and December.

In terms of the extent of interest rate cuts throughout the year, there are currently two institutions — Jefferies (Jefferies) and Mizuho — that do not expect the Federal Reserve to cut interest rates during the year; the expectations are the most hawkish. Meanwhile, on the other side, the Mitsubishi UFJ Financial Group's forecast is the most dovish. It expects the Federal Reserve to cut interest rates by 125 basis points throughout the year, and the first rate cut will occur in July.

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