Next week 50 basis points rate cut? Goldman Sachs pours cold water: 25 basis points is enough to combat recession, cutting too much releases "negative sentiment"

The biggest suspense in the current market is whether the Fed will cut interest rates by 25 or 50 basis points next week, and Goldman Sachs analysts seem to lean more towards the "25 basis points rate cut" camp.

Overnight, Wall Street Journal reporter Nick Timiraos, known as the "Fed's communication agency," released another piece of news. In the article, it was mentioned that a 25 basis points rate cut is the "path of least resistance," but at the same time, starting with a 50 basis points rate cut can reduce market debates on the extent of future rate cuts.

The "dovish" expression in the article triggered a strong market reaction. After a dismal auction of the U.S. 30-year Treasury bonds overnight, yields exceeded 4.00%. However, Timiraos' "dovish" expression subsequently led to a rebound in long-term U.S. bonds, with the market believing that the Fed, through Timiraos, has put the choice of "50 basis points" on the table.

Subsequently, Goldman Sachs provided a different perspective. Despite the new Fed communication agency "hinting" at a 50 basis points rate cut, this is not considered an "official source of information," and a 25 basis points rate cut remains the most probable event. Goldman Sachs strategist Paolo Schiavone stated:

Although the upcoming FOMC decision may cause market volatility, the Fed is more likely to choose a relatively moderate 25 basis points rate cut. This judgment is based on experience and market logic, rather than an "official source of information."

Schiavone further pointed out:

If there is a 50 basis points rate cut, it would mean that the Fed may lean towards a significantly loose monetary policy, which usually indicates that the Fed is more concerned about economic slowdown and believes that a larger rate cut is needed to stimulate economic growth.

However, the combination of fiscal policy, monetary policy, and foreign capital inflows can help sustain economic growth, thereby combating the risk of recession. This policy mix can slow down or avoid economic downturn.

At the same time, Schiavone stated that basic macro assumptions suggest that U.S. economic growth may have bottomed out:

Our growth expectations for the 2025 fiscal year are 2.5%, with a range of 2.3-2.7%; our core PCE for the 2026 fiscal year is 2.6%, rent OER is 2.2%, and the labor market is stabilizing normally; in addition, the Fed has ample room to cut rates and provide downside protection against risks.

Furthermore, Goldman Sachs' RAI (Risk Appetite Index) shows that the decline in the U.S. dollar, monetary policy, and reduced EU risks are driving investors' interest and confidence in risk assets, while global economic growth weakness is a negative factor affecting investors' risk appetite Overall, Goldman Sachs stated that traditional economic indicators are failing, and there may be more market volatility ahead:

1. The inversion of the 2-10s yield curve typically signals a recession, but in the current situation, using these indicators to analyze the cycle is too simplistic.

2. Increasing positions in UXU4 (VIX) (futures contracts on the VIX volatility index) may indicate more market volatility ahead, with investors potentially underestimating risks.

3. Stocks in the semiconductor industry have risen too high, indicating they may be overvalued, and there could be a correction in the future