Goldman Sachs: No Fed Rate Cuts This Year - FJElite

We are pushing the final two rate cuts in our Fed forecast back to June and December of 2027. The labor market has been stronger than we anticipated, and we now expect the unemployment rate to rise only a touch further to 4.4%, not enough to create a sense of urgency to lower rates. We continue to see rate hikes as unlikely, though somewhat more likely than we initially thought. Fed commentary has turned more hawkish, and the resilient activity and employment data lower the bar for a hike. But we have not yet seen signs that the inflation shock from the war is broadening out, and with the labor market in balance and wage growth running below the rate compatible with 2% inflation, the inflation shock looks less likely to become self-sustaining.

We have left our terminal rate forecast at 3-3.25%, largely because the FOMCs longer-run dots have been stable over the past year and most participants envision further normalization. But a longer pause provides more time for solid economic performance to convince them that the funds rate is already in an appropriate place, and we see a flat path as a plausible alternative. Even allowing for a somewhat greater chance of rate hikes and a possible flat path, our probability-weighted Fed forecast remains meaningfully more dovish than market pricing.