A significant recalibration in market expectations is underway, with prominent financial institutions now forecasting an earlier start to the US Federal Reserve’s easing cycle. Goldman Sachs has notably brought forward its prediction for the first interest rate reduction to September 2024, a move that suggests underlying economic data is beginning to show sufficient weakness to warrant a policy pivot sooner than previously anticipated.
Key Takeaways
- Goldman Sachs has revised its forecast, now expecting the first Federal Reserve rate cut in September 2024, shifting from a previous projection of December.
- The pivot is primarily driven by softer inflation prints, particularly the core Personal Consumption Expenditures (PCE) price index, and signs of a cooling labour market.
- Market pricing, reflected in Fed funds futures, indicates a high probability of a September cut, aligning closely with the revised institutional view.
- An earlier easing cycle has distinct implications for asset allocation, potentially favouring duration-sensitive growth equities and pressuring the US dollar.
- The primary risk to this forecast is a potential resurgence in inflation or unexpectedly robust economic data, which could force the Fed to maintain its restrictive stance for longer.
The Catalyst for a Change in View
The adjustment in forecasting from major investment banks is not a trivial matter; it reflects a tangible shift in the macroeconomic landscape. The primary impetus behind Goldman Sachs’ revised timeline is the recent behaviour of inflation. May’s core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred gauge, rose by a modest 0.1%, bringing the annual rate down to 2.6%.1 This deceleration is a critical piece of evidence for Fed officials seeking “greater confidence” that inflation is moving sustainably towards their 2% target.
Complementing the inflation data are signs of a controlled cooling in the US labour market. While payroll figures remain solid, other indicators point towards a better balance between labour supply and demand. Job openings have moderated, and the quits rate has returned to pre-pandemic levels, suggesting wage pressures are likely to ease further. This combination of disinflation and labour market normalisation provides the Federal Reserve with a credible window to begin easing policy without risking a second wave of inflation.
From December to September: A Tale of Two Forecasts
The evolution of this forecast highlights the data-dependent nature of modern central banking. The prior consensus for a December cut was predicated on a slower disinflationary path. The updated view reflects an acceleration of that trend.
| Forecast Aspect | Previous Goldman Sachs Forecast (Early 2024) | Current Goldman Sachs Forecast (July 2024) |
|---|---|---|
| First Rate Cut | December 2024 | September 2024 |
| Total Cuts in 2024 | One (25 bps) | Two (50 bps total) |
| Pacing in 2025 | Quarterly cuts | Three additional cuts anticipated2 |
| Underlying Rationale | Sticky inflation and robust growth | Faster disinflation and balanced labour market |
Market Pricing and Asset Allocation Implications
Financial markets have moved swiftly to price in this earlier timeline. According to the CME FedWatch Tool, the probability of a 25 basis point cut at the September meeting is now consistently hovering above 60%.3 This alignment between institutional research and market pricing creates a powerful narrative that asset allocators cannot ignore.
The strategic implications are significant. An earlier-than-expected easing cycle tends to favour assets with longer duration, as their future cash flows are discounted at a lower rate. This typically benefits growth-oriented equities, particularly in the technology sector, which have been sensitive to interest rate fluctuations. Conversely, it could place downward pressure on the US dollar as interest rate differentials with other major economies narrow. A weaker dollar, in turn, could provide a tailwind for emerging market assets and US-based multinational corporations with significant overseas earnings.
In fixed income, the focus shifts to the shape of the yield curve. A pre-emptive cut to stave off a slowdown could lead to a ‘bull steepening’ scenario, where short-term yields fall faster than long-term yields. However, if the market interprets the cut as a policy error or a signal of a deeper-than-expected downturn, it could trigger a flight to quality that pushes long-term yields down even further, potentially deepening the curve’s inversion.
Risks and Contrarian Considerations
While the case for a September cut has strengthened, it is far from guaranteed. The Federal Reserve has been scarred by the inflationary surge of 2021-2022 and remains highly cautious about easing policy prematurely. Any single piece of data, such as an unexpectedly high inflation report or a blowout jobs number, could easily push the timeline back to December or even into 2025.
Furthermore, there is no universal consensus. While a growing number of analysts are coalescing around a September or December timeframe, some dissenters remain, arguing that underlying economic resilience and persistent service-sector inflation will compel the Fed to hold rates higher for longer. The path of least resistance appears to be towards easing, but the journey is likely to be volatile and highly sensitive to incoming data.
A final thought: the market may be getting ahead of itself by not just pricing in a September cut, but also a consistent easing cycle thereafter. A plausible alternative scenario involves the Fed delivering a single ‘insurance cut’ in September, accompanied by hawkish commentary that signals a prolonged pause to assess the impact. Such an outcome could wrong-foot market participants positioned for a steady stream of reductions, triggering a reversal in duration-sensitive assets and a short-term rally in the dollar. The first cut may be coming into view, but the path that follows remains remarkably uncertain.
References
- Bureau of Economic Analysis. (2024, June 28). Personal Income and Outlays, May 2024. U.S. Department of Commerce. Retrieved from https://www.bea.gov/news/2024/personal-income-and-outlays-may-2024
- Schulze, E. & Son, H. (2024, July 1). Goldman Sachs now expects the Fed to start cutting rates in September. CNBC. Retrieved from https://www.cnbc.com/2024/07/01/goldman-sachs-now-expects-the-fed-to-start-cutting-rates-in-september.html
- CME Group. (2024). CME FedWatch Tool. Retrieved from https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
- unusual_whales. (2024, July 1). Goldman Sachs, $GS, now predicts a September rate cut. [Post]. Retrieved from https://x.com/unusual_whales/status/1807751913076134371
