Goldman Pulls Forward Rate Cut Expectations As Inflation Slows

Goldman Sachs has pulled forward its expected timing for Fed rate cuts and lowered its "terminal" rate in this cycle, largely on the basis of inflation data this week rather than just the dovish Fed decision yesterday:

• "We now forecast three consecutive 25bp cuts in March, May, and June to reset the policy rate from a level that Powell has recently taken to describing as “well into restrictive territory” rather than just “restrictive” and that most of the FOMC will likely soon see as far offside with inflation trending near 2%. We think that January is too soon for the first cut because the FOMC will want to signal it ahead of time in its statement and because the wage numbers are still a bit too high, as Powell said" at Wednesday's press conference."
• They see the pace of cuts then slowing to once per quarter until reaching 3.25-3.50%, 25bp lower than their previous estimate. (View pre-FOMC: first cut Q3 2024, reductions continue until 3.5-3.75% in early 2026).
• As for yesterday's decision, Goldman writes that the FOMC delivered a dovish message via the 3 2024 cuts implied by the Dot Plot, but "we learned more about the inflation outlook today [via PPI data] than about the FOMC’s reaction function" with November core PCE implied at 0.07% M/M and as Powell noted only 3.1% Y/Y.
• On inflation: "By some measures the trend is already at or near 2%. Far from facing a widely expected “last mile” problem, core PCE inflation appears to have slowed from 4% annualized in 2023H1 to 1.9% annualized in 2023H2, according to our revised estimate."
• Goldman has revised down their Dec 2024 core PCE forecast to 2.2% (from 2.4%) and 0.1pp lower in 2025 and 2026 - "In light of the faster return to target, we now expect the FOMC to cut earlier and faster." They've also nudged up their GDP forecasts, and lowered their unemployment rate forecasts.