Federal Reserve Signals Slower Interest Rate Cuts
Investing.com – Goldman Sachs predicts that the Federal Reserve will likely indicate a slower pace of interest rate cuts in 2025 this week, with no rate reduction in January due to concerns about persistent inflation and a robust labor market.
The central bank is anticipated to reduce rates by 25 basis points this week, which would total a 100 bps cut for the year.
However, Goldman Sachs warns that the Fed may be eager to communicate a slower cutting pace, and the ultimate rate may be higher than previously anticipated.
The investment bank now believes that the Fed will maintain its current rate in January, contrary to earlier predictions for a cut.
According to Goldman Sachs analysts, “One reason is that unemployment has undershot and inflation has overshot the FOMC’s projections, though neither surprise is quite as significant as it appears.” They suggest that the Fed’s caution may be influenced by potential new policies under the Donald Trump administration, especially regarding trade tariffs.
The analysts added that risks concerning interest rates could be more balanced than usually assumed due to possible policy shifts.
Fed officials have shown more willingness to examine the terminal rate, implying a careful approach to where rate cuts may cease.
The focus of this week’s meeting will be the Fed’s inclination towards slowing its cut pace or adopting a data-dependent, meeting-by-meeting strategy.
Goldman Sachs expects mixed messaging from the Fed regarding future rate cuts.
Fed to Cut Rates in 2025, but Terminal Rate Higher
Goldman Sachs anticipates the central bank will still implement rate cuts in March, June, and September 2025, each by 25 bps.
Despite this, the forecast for the terminal rate in this easing cycle has been slightly revised higher, now estimated at 3.5% to 3.75%.
These shifting expectations followed persistent inflation readings for November, alongside robust data from the labor market.
Traders are currently estimating almost an 80% likelihood that the Fed will keep rates unchanged in January, as per CME Fedwatch.
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