Goldman Sachs Sets Expectations for Fed with Forecast of Five Interest Rate Drops from March Onward
Goldman Sachs economists predict that starting in March, the Federal Reserve is likely to decrease its main interest rate and make a total of five cuts in 2024.
The investment bank believes the U.S. economy will experience a “soft landing,” with slower economic growth and decreasing inflation throughout the year.
Goldman anticipates the central bank will gradually lower interest rates, leading to reduced borrowing costs for consumers and businesses.
Despite inflation slowing down and the economy remaining stable, the Fed kept the federal funds rate at a 22-year high last month.
This supports the idea that the central bank’s previous rate hike in July marked the end of its efforts to control price and wage increases. Although Fed policymakers haven’t ruled out the possibility of raising rates again if inflation becomes a concern, they currently project three rate cuts in the coming year.
Fed Chair Jerome Powell stated during a conference call to explain December’s decision that “the appropriate level [of the federal funds rate] will be 4.6% at the end of 2024” if the Fed’s economic projections come to pass.
“The Fed will start cutting the funds rate soon, most likely in March. After all, Chair Powell said at the December 13 press conference that the committee would want to cut ‘well before’ inflation falls to 2%,” according to a research note by Goldman economist Jan Hatzius. “However, we expect ‘only’ five cuts this year, below the six-to-seven cuts now discounted in market pricing, and we view the chance of 50 basis points steps as low.”
The current range for the federal funds rate, which banks charge one another for overnight loans, is 5.25% to 5.5%. A five-period decrease of 25 basis points would reduce the benchmark to 4.25% from 4%.
The rise in borrowing costs has a positive side for savers, as high-interest savings accounts can now offer yields of 5% or more. However, as interest rates decrease, these yields are likely to decrease as well.
Investors might consider putting their money into longer-term certificates of deposit with higher rates, but these rates are expected to fall once the Federal Reserve starts easing.
Prospective homebuyers, sellers, and those looking to refinance are curious about how much mortgage rates will drop with the potential of lower rates and borrowing costs. A recent survey shows that about 31% of people believe home loan costs will decrease in the next 12 months, which is a more optimistic outlook than the previous month.
Mortgage rates don’t always follow the Fed’s rate changes but often correlate with the yield on the 10-year U.S. Treasury note. Rates on home loans are influenced by investors’ expectations for future inflation, global demand for Treasurys, and Fed policy.
According to Fannie Mae, the rate on a conventional 30-year fixed-rate mortgage has dropped to 6.66% from nearly 8% in November. Most real estate experts predict rates will remain in the 6% range.
Traders are indicating a 73% chance that the Fed could lower rates in March, according to the CME’s Fed watch tool.
