In the "Trump 2.0" era, how will the Federal Reserve cut interest rates next year? Goldman Sachs and the market have different views.

On December 1st, Goldman Sachs released a report showing that analyst Jan Hatzius and his team surveyed over 500 market participants, comparing Goldman Sachs' expectations with those of investors (the market) to better understand the policy expectations reflected in market pricing.

According to the report, Goldman Sachs and the market have consensus on the impact of Trump's policies on U.S. immigration and fiscal policy, but there is a difference in opinion on the interest rate reduction path of the Federal Reserve next year.

Goldman Sachs expects the Federal Reserve to cut interest rates continuously in the first quarter of 2025, then gradually slow down, with the final two rate cuts in June and September, while the interviewees' expectations are more hawkish.

Goldman Sachs does not agree with the market's more hawkish expectations. On the one hand, Goldman Sachs believes that Trump's policies are unlikely to cause significant inflation that would prevent rate cuts; on the other hand, Goldman Sachs believes that the market underestimates the significant impact risks that substantial policy changes could have on financial markets, a shock that could trigger a reaction similar to the 2019 "insurance cut".

Divergence: Goldman Sachs believes that the market's expectations of Federal Reserve rate cuts are too hawkish.

Goldman Sachs and the interviewees have similar views on the fiscal policies that the new Trump administration may adopt, but they have different opinions on the monetary policy outlook resulting from policy changes.

Goldman Sachs expects the Federal Open Market Committee (FOMC) of the Federal Reserve to continue its rate cuts in the first quarter of 2025, then gradually slow down the pace, with the last two rate cuts in June and September.

Respondents' expectations are more hawkish, which Goldman Sachs disagrees with for two reasons:

First, Goldman Sachs believes that the policies of the new Trump administration are unlikely to cause significant inflation that could prevent rate cuts.

Goldman Sachs believes that although a reduction in immigration may create upward pressure on wages and prices in industries that employ many immigrants, the overall impact on wages and prices is relatively modest because immigration increases demand while also increasing supply.

Furthermore, Goldman Sachs expects the new government's fiscal stimulus to be relatively mild, having almost no impact on inflation. In addition, under the baseline scenario, tariffs are expected to have a moderate and one-time impact only.

Secondly, Goldman Sachs believes that the market underestimates the significant risks of major policy changes on the financial markets, which could trigger a significant impact similar to the "insurance rate cuts" seen in 2019.

For example, the impact of a universal 10% tariff on monetary policy could be two-fold: temporary inflation increase but economic growth slowdown. In the previous trade friction, the Federal Reserve ultimately prioritized growth risks and lowered the federal funds rate by 75 basis points.

Consensus: Slight decrease in net immigration, continuation of tax reduction policies, increase in tax exemptions.

Goldman Sachs expects that the new Trump administration will tighten immigration policies. Before the pandemic, the average annual net immigration to the USA was about 1 million people. Goldman Sachs predicts that by 2025, this number will decrease to 0.75 million people per year, only slightly lower than before the pandemic, due to certain limitations in legal and logistical aspects of administrative measures.

According to Goldman Sachs' survey, about half of the respondents expect net immigration to remain at levels between 0.5 million and 1 million people per year, which is in line with Goldman Sachs' forecast. It is worth noting that although there have been numerous recent news reports about possible large-scale deportation of immigrants, only 6% of the respondents expect net immigration to become negative.

In addition, Goldman Sachs forecasts that the tax cuts of 2017 will be fully extended by the end of 2025, including reinstating some expired corporate investment incentives. Goldman Sachs also forecasts that the federal spending of the new Trump administration will increase, including adding approximately 0.2% of GDP in personal tax exemptions.

Respondents also expect the tax cuts policy to continue. About two-thirds of the respondents expect the tax cuts policy to be fully extended, while one-third expect it to be partially extended.

Regarding personal tax exemptions, about two-thirds of the respondents expect an increase, but most investors expect these exemptions to be less than $100 billion or less than 0.3% of GDP annually.

Respondents have varying expectations about government efficiency department spending cuts. 42% of investors expect the reduction to be negligible or extremely limited, 19% expect the reduction to be between $25 billion and $100 billion, and 32% expect the reduction to exceed $100 billion, equivalent to 0.3% of GDP annually.

Editor/rice