US investment bank Goldman Sachs expects the US Federal Reserve to cut interest rates three times this year, basing its analysis on the limited impact of tariffs and growing weakness in the labor market.
According to a research note by the global investment bank, this change in expectations comes after previous estimates indicated the start of the monetary easing cycle only in December, reflecting a change in the bank's view of the path of US monetary policy over the coming period.
These forecasts are linked to an economic context marked by uncertainty due to US trade policies, particularly the imposition of new tariffs on imports from major countries such as China.
These fees raised concerns about rising inflation, but recent data showed that the inflationary impact of the fees was less than expected, with Goldman Sachs analysts considering it a one-time impact on the price level rather than ongoing inflationary pressure.
The bank noted in the memo that several factors prompted it to bring forward the interest rate cut, most notably that the impact of tariffs was less than expected, reducing inflationary pressures on the US economy. This was in addition to the persistence of deflationary trends, such as slowing wage growth, declining housing rent inflation, and weak travel demand, which reinforces the climate of slowing inflation in the US.
He also pointed to signs of weakness in the labor market, whether due to an actual decline or significant fluctuations in monthly employment data, which point to the possibility of a broader economic slowdown.
Based on these data, Goldman Sachs believes that there are several scenarios that could prompt the Fed to begin reducing rates in September, including the continued weakness of tariffs on inflation, an accelerating decline in inflation rates, and the emergence of real or expected weakness in the US labor market.
As a result, the bank lowered its final interest rate forecast to a range of 31 TP3T to 3.25 TP3T, compared to its previous forecast of 3.51 TP3T to 3.75 TP3T, reflecting a belief that monetary policy may not need to be as tightened as previously anticipated.
In light of these changes, Goldman Sachs raised its estimate of the probability of the US economy entering a recession in 2025 to 451 TP3T, up from 351 TP3T in its previous estimate. This is due to growing fears of tightening financial conditions and declining investment spending due to political and trade uncertainty, in addition to the risk of foreign consumers boycotting US goods.
The bank believes the Fed may prefer a series of rate cuts if clear signs of labor market weakness or continued decline in inflation emerge, similar to what happened in 2019. However, it does not anticipate a cut in July unless exceptionally weak employment data is released.
On the other hand, there are concerns that continued uncertainty regarding trade policies may push companies to reduce their investments or postpone expansion plans, which could negatively impact economic growth rates in the coming months. Furthermore, the recent rise in interest rates has increased borrowing costs for households and businesses, contributing to a slowdown in the real estate market and a decline in sales of automobiles and other interest-sensitive sectors.
In its last meeting, the US Federal Reserve left interest rates unchanged, in line with market expectations.
The Federal Open Market Committee, which sets interest rates, kept its target interest rate in a range of 4.251 to 4.51, the level it has held since last December.
