The predictions for Federal Reserve interest rate cuts are starkly different between Morgan Stanley and Goldman Sachs Group. While Morgan Stanley economists forecast deeper cuts due to slowing inflation, Goldman Sachs predictions are more in sync with the Federal Reserve’s own estimates.
What Happened: A Bloomberg report reveals that Morgan Stanley economists anticipate the Federal Reserve to start rate cuts from June 2024, followed by additional cuts in September and every meeting after that. They believe this will bring down the policy rate to 2.375% by the end of 2025.
Contrarily, Goldman Sachs predicts the first 25-basis-point reduction only in the fourth quarter of 2024, with one cut per quarter through mid-2026, which would set rates in a 3.5%-3.75% target range. This outlook aligns closer with the Federal Reserve’s own projections.
See Also: Powell Closes The F—— Door On Early Rate Cut Hopes: Stocks, Bonds Tumble While Dollar Rallies
Morgan Stanley’s team sees a weaker economy that necessitates more easing, albeit without a recession. They forecast a peak unemployment rate of 4.3% in 2025, slower growth, and lower inflation than what Federal Reserve officials anticipate.
Conversely, Goldman Sachs expects the Federal Reserve to maintain relatively high rates due to a higher equilibrium rate, larger budget deficits, and the fading of post-financial crisis headwinds.
Why It Matters: The Federal Reserve had earlier maintained a pause on rate changes, with the federal funds rate kept within the range of 5.25% to 5.5% since November.
The Fed Chair Jerome Powell had then expressed the need for significant progress towards the 2% inflation target before considering rate cuts. He reiterated this stance during a conference, emphasizing the need for continued efforts to achieve the inflation target.
However, as Goldman Sachs had hinted earlier, the possibility of ‘insurance cuts’ starting from 2024 had been on the table, and it seems their latest forecast aligns with this outlook.
Photo by Monster Ztudio on Shutterstock
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