Goldman Sachs: The Federal Reserve has "good reason" to cut interest rates in July

Goldman Sachs economists have recently stated that they see sufficient reasons to support the Federal Reserve's earliest interest rate cut at the FOMC meeting in July. However, Goldman Sachs has not changed their prediction that the Federal Reserve will begin its first rate cut in September.

Goldman Sachs Chief Economist Jan Hatzius and others pointed out that the latest unemployment and inflation data show that the Federal Reserve's monetary policy rule requires the federal funds rate to be at 4%, while the current target range is 5.25%-5.5%, indicating a significant gap between the two.

Based on a series of macroeconomic data including the U.S. CPI, as well as Chairman Powell's testimony in Congress last week, Goldman Sachs expects that the Fed rate cut will start soon.

Currently, the market almost entirely expects the Fed to cut rates at the FOMC meeting on September 17-18, which remains Goldman Sachs' baseline forecast. However, Goldman Sachs believes there are sufficient reasons for an interest rate cut as early as the meeting on July 30-31.

The reasons are mainly threefold:

• First, if the reasons for a rate cut are clear, why wait seven weeks to implement it?
• Secondly, there is significant monthly inflation volatility. If there is a temporary acceleration in U.S. inflation in the coming months, explaining a rate cut in September may be difficult. Starting the rate cut in July can avoid this risk.
• Third, even though the FOMC has never admitted it, it is undeniable that they have a motive to avoid starting rate cuts in the last two months of the U.S. presidential campaign.

Hatzius concluded that this does not mean the Fed cannot cut rates in September, but it does mean that a rate cut in July would be better.

On the same day, Fed Chairman Powell, in a public speech, refused to disclose the timing of the Fed's next steps, which was entirely expected. However, he did mention that the recent three U.S. inflation data points have strengthened their confidence.

U.S. Inflation, Employment

Hatzius pointed out in the report that the U.S. core CPI rose only 0.06% in June, confirming that the inflation rebound in the first quarter was an outlier, partly due to seasonal factors. Goldman Sachs estimates the monthly inflation rate for U.S. core PCE in June to be 0.19%, and further expects data for July and August to be more moderate, partly due to cooling housing inflation.

In the July inflation report, the cooling of housing-related inflation may be particularly evident, as housing inflation is calculated based on a 6-month average growth rate, and the inflation rate in January was high.

Goldman Sachs noted that evaluating the U.S. labor market requires sifting through a large amount of seemingly contradictory and, in some cases, distorted data. However, the baseline is clear. While layoffs are still relatively low, the unemployment rate is gradually rising as hiring is not sufficient to absorb all new labor force entrants.

So far, Fed officials have welcomed the rise in the unemployment rate. In agreement with Powell's assessment, Goldman Sachs believes that the U.S. labor market has now fully rebalanced. However, Goldman Sachs believes that the U.S. may be approaching a turning point, after which further softening in labor demand will lead to a more significant increase in the unemployment rate, which is not desirableOverall, recent employment data has been weak, and GDP growth is slightly below trend levels, these factors are worth paying attention to. It is based on the above situation that Goldman Sachs estimates that the median value in the monetary policy rule for Federal Reserve officials now requires the federal funds rate to be 4%