After multiple rounds of interest rate hikes in the Global major economies, 2024 has entered a rate cut cycle.

However, as monetary policy gradually loosens, market focus is turning to a critical question: when and how will these rate cut cycles end?

On the 22nd, the Goldman Sachs Analyst Jan Hatzius team released a Research Report, summarizing three main patterns by analyzing the historical end of "soft landing" monetary easing cycles in G10 economies:

Central banks tend to end easing cycles slowly and cautiously (typically pausing rate cuts); an increase in the unemployment rate or a policy rate above neutral rates will prompt central banks to continue cutting rates; and central banks tend to lower the policy rate below the neutral rate.

The Research Report suggests that these historical patterns support the current dovish expectations for interest rates in G10 countries, with countries like the Federal Reserve and Canada likely to continue cutting rates. Goldman Sachs also predicts that the Federal Reserve will cut rates three more times in 2025, each by 25 basis points.

Rate cut rhythm: fast at first, then slow, with cautious adjustments.

Goldman Sachs' analysis indicates that historically, when G10 countries enter the "soft landing" phase, central banks typically adopt a policy operation of "preemptive easing."

In the first six months of a rate-cutting cycle, the central bank tends to advance rate cuts at a rapid pace, completing about 50% of the total rate cut. However, the pace of rate cuts significantly slows down in the later stages. Data shows that in the three months before and after a rate-cutting cycle, the average rate cut drops from 1.1 percentage points to 0.7 percentage points.

Moreover, pauses in rate cuts are a common phenomenon during rate-cutting cycles in history. Over 70% of rate-cutting cycles have experienced at least one pause, and nearly 50% of cycles have seen two or more pauses. This indicates that the central bank becomes more cautious in the later stages of the rate-cutting cycle, gradually adjusting policies to approach the target interest rate.

This pattern also determines the overall duration of rate-cutting cycles: nearly half of the 'soft landing' rate-cutting cycles last more than a year, indicating that rate cuts do not end quickly, but rather complete policy adjustments in a more nuanced way.

Key factors: the impact of unemployment rate and neutral interest rate.

In determining when a rate-cutting cycle ends, Goldman Sachs identified two key variables: the unemployment rate and the level of policy interest rates relative to the neutral interest rate.

First, if the unemployment rate rises after the initiation of a rate-cutting cycle, the probability that the central bank will continue to cut rates significantly increases. Goldman Sachs's regression analysis indicates that each time the unemployment rate rises by 1 percentage point, the likelihood of continuing to cut rates increases by 40 percentage points. This reflects the central bank's high sensitivity to labor market conditions, with changes in the unemployment rate being viewed as a priority consideration for monetary policy adjustments.

Second, the level of policy interest rates is also an important influencing factor. If the current policy interest rate is higher than the central bank's neutral interest rate estimate, the rate-cutting cycle will typically continue. This phenomenon is particularly evident in the early stages of economic recovery; Goldman Sachs estimates that for every 1 percentage point that the policy interest rate exceeds the neutral rate, the likelihood of rate cuts increases by 25 percentage points.

Ending pattern: ending the easing cycle below the neutral interest rate.

Historical data shows that the interest rate cut cycle in G10 countries usually ends when the policy interest rate falls below the neutral level. On average, the endpoint of the rate cut cycle is 1 percentage point lower than the neutral interest rate, and the data distribution shows a downward bias. This indicates that when the economy approaches a "soft landing," central banks tend to adopt a more accommodative monetary policy.

Additionally, the rise in unemployment rate is a major driving factor for policy overshooting at the end of the rate cut cycle. Goldman Sachs' analysis indicates that whenever the unemployment rate rises by 1 percentage point, the probability of central banks lowering the policy interest rate below the neutral level increases by 20 percentage points. In contrast, the impact of core inflation rate and GDP growth on the continuation of rate cuts is relatively limited.

Outlook: The Federal Reserve's statements align with the historical pattern of slowing down during the later stages of the rate cut cycle.

Based on these historical patterns, Goldman Sachs holds a dovish expectation for the monetary policy direction of major economies in the future. The report notes that unemployment rates in countries such as the USA, Canada, and Sweden have already risen significantly, and the central banks of these countries may continue their rate cut actions to address economic growth slowdown and labor market pressures.

Taking the Federal Reserve as an example, even though it released relatively "hawkish" signals at its December 2024 meeting, indicating uncertainty regarding the magnitude and timing of future rate cuts, Goldman Sachs believes that this statement does not imply the end of the rate cut cycle, but rather aligns with the historical pattern of slowing down in the later stages of the rate cut cycle.

Goldman Sachs expects that the Federal Reserve will further cut rates three times in 2025, with each cut being 25 basis points.

Editor/Rocky