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Goldman Sachs Forecasts Federal Reserve Rate Cuts in First Half of 2024 as Inflation Declines
Potential Rate Cuts and the Fed's StanceGoldman Sachs predicts that the Federal Reserve will initiate interest rate cuts within the first six months of 2024, although the forecast remains uncertain. While there is a possibility that the Fed may choose to maintain higher rates for a longer period to address inflation concerns, evidence suggests that the Federal Open Market Committee (FOMC) can ease rates gradually until benchmark borrowing rates reach significantly lower levels.
Baseline Forecast and Potential RisksAccording to Goldman economist David Mericle, the baseline forecast calls for rate cuts to begin in the second quarter of 2024, progressing at a rate of 25 basis points per quarter until reaching a range of 3% to 3.25%. However, Goldman does not perceive a strong need for cuts and believes there is a significant risk that the FOMC will maintain steady rates instead. The current federal funds rate target range stands between 5% and 5.25%, the highest level in over 22 years.
Inflation Outlook and Cautionary ApproachGoldman Sachs sees a minimal chance of economic contraction and expects inflation, as measured by core personal consumption expenditures (PCE) prices, to drop below 3% on a year-over-year basis by mid-2024. As of June, the PCE ex-food and energy level was running at a 4.1% annual pace. While the Fed is making progress towards its long-term inflation objective, central bank officials remain cautious about prematurely declaring victory over inflation, which was at its highest level in over 40 years just a year ago.
Motivation for Rate Cuts and Potential RegretsMericle explains that cutting rates outside of a recession would aim to normalize the funds rate from a restrictive level back towards neutrality as inflation approaches the target. However, normalization is not an urgent motivation for cutting, and there is a significant risk that the FOMC will maintain steady rates. Goldman has maintained a high threshold for rate cuts, as officials aim to minimize the risk of regretting the decision if inflation remains too high. In conclusion, Goldman Sachs forecasts rate cuts by the Federal Reserve in the first half of 2024, considering declining inflation. However, uncertainties remain, and the FOMC may opt to hold steady. The market largely aligns with Goldman's projections for the first rate reduction, but the firm's outlook is slightly less aggressive than the full-year forecast. Ultimately, Goldman anticipates the Fed to cease cutting rates when the funds rate reaches the 3% to 3.25% range, higher than the natural rate of interest adjusted for inflation.
Implications for New Businesses: Navigating the Predicted Rate CutsGoldman Sachs' forecast of potential Federal Reserve rate cuts in 2024 could have significant implications for new businesses. If the forecast holds true, businesses could benefit from lower borrowing costs, which could stimulate investment and growth. However, the uncertainty surrounding these predictions underscores the need for businesses to remain agile and prepared for various economic scenarios.
Adapting to Changing Economic ConditionsThe potential for the Federal Reserve to maintain higher rates for a longer period to combat inflation could impact the cost of capital for new businesses. This could necessitate a more cautious approach to borrowing and investment. On the other hand, if the Fed eases rates as predicted, businesses could take advantage of lower borrowing costs to invest in growth and expansion.
Planning for UncertaintyThe potential for rate cuts beginning in 2024, as forecasted by Goldman Sachs, presents both opportunities and challenges for new businesses. While lower rates could reduce borrowing costs and stimulate investment, the uncertainty surrounding these predictions highlights the importance of scenario planning and financial flexibility. Businesses that can adapt to changing economic conditions and navigate potential rate changes will be better positioned to thrive in the evolving economic landscape.
Article First Published at: https://www.cnbc.com/2023/08/14/goldman-sees-the-fed-cutting-rates-in-first-half-of-next-year-as-inflation-falls.html Brought to you by ChatGPT for www.BusinessFormation.io