Goldman Sachs delays the "first rate cut" by the Federal Reserve to July after strong data "slaps in the face"
So far this year, strong US economic and inflation data have led investors to postpone their expectations for a rate cut by the Federal Reserve. According to CME's Fed watch tool, interest rate futures positions indicate that the Fed may not cut rates until July or September. Active consumer shopping and rising inflation data suggest that the US economy remains robust. Goldman Sachs economists expect first-quarter economic growth to reach 3.1% and have delayed their rate cut expectations to July for the first time. They believe that inflation will not continue to rise
According to the Zhītōng Finance and Economics APP, the strong economy and hot inflation data so far this year have surprised investors, leading them to postpone their expectations for a rate cut by the Federal Reserve.
Based on CME's Fed watch tool, interest rate futures positions indicate that the Fed may not cut rates until July or September.
In the fourth quarter of last year, the US economy saw an astonishing annualized growth rate of 3.4%. The Atlanta Fed's forecasting tool shows that the first quarter's annualized growth rate is 2.9%, still robust.
One strong indicator of the US economy is active consumer shopping. Retail sales in March increased by 0.8%. This is significant as consumer spending accounts for about two-thirds of the US GDP.
In terms of inflation, the US Personal Consumption Expenditures (PCE) price index rose by 2.5% year-on-year in February, higher than January's 2.4% and above the Fed's 2% target. The PCE price index is a favored inflation indicator for the Fed when setting interest rate policies.
A more common inflation indicator, the Consumer Price Index (CPI), climbed even higher, rising by 3.5% year-on-year in March.
Goldman Sachs Updates Economic and Inflation Outlook
Goldman Sachs analysts stated that the US economy "should be able to withstand the impact of a later-than-expected rate cut by the Fed."
They mentioned strong personal consumption and a thriving labor market. In March, employment surged by 303,000, and the unemployment rate dropped to 3.8%. Additionally, industrial production grew by 0.4% in March.
Therefore, Goldman Sachs economists have just raised their first-quarter economic growth forecast from the previous 2.5% to 3.1%. In comparison, the general Wall Street expectation was 2.5%.
Goldman Sachs predicts that the first-quarter annualized PCE index, excluding food and energy prices, will reach a high of 4%. This would be the highest three-month increase in a year.
So, what does all this mean for the interest rate outlook?
Analysts state that given the higher-than-expected March CPI data, "we have pushed back our expectation for the Fed's first rate cut of 25 basis points to July, with risks tilted toward later." They previously expected the Fed to start cutting rates in June.
It is certain that Goldman Sachs believes inflation will not continue to rise. They stated: "Given special factors in recent inflation data, stable inflation expectations, and ongoing labor market rebalancing, we remain satisfied with the anti-inflation narrative."