Goldman Sachs has changed its forecast for a Federal Reserve interest rate cut to September, instead of December. This shift comes as inflation, driven by tariffs, shows signs of easing. Additionally, there are signs of disinflation, such as slower wage growth and weakening consumer demand. Chief U.S. economist David Mericle estimates there’s a little over a 50% chance of a rate cut in September. The firm expects cuts of 25 basis points in September, October, and December, with two more cuts anticipated in early 2026. While the job market is strong, there are challenges, including fewer job openings. Seasonal changes and immigration might also affect payrolls, which could influence the Fed’s decisions if employment reports are disappointing.

Observations on Inflation Passthrough

Goldman Sachs reports less inflation passthrough from tariffs. Inflation expectations are cooling due to the fading impact of the pandemic and mixed signals from consumer surveys. The Federal Reserve now has a higher threshold for cutting rates than it did in 2019, but rising uncertainties, especially regarding Jerome Powell’s term, may lead to more flexibility in policy soon. The initial part of the article highlights a shift in expectations about monetary policy. Goldman Sachs now believes the Federal Reserve will start cutting interest rates in September rather than December, mainly due to slowing inflation. This slowdown is not just a one-off event; it’s a gradual decline in wage pressures and consumer demand. Mericle suggests a greater than 50% chance of a rate cut in early autumn, clarifying what had previously been uncertain. Their main scenario includes three small cuts of 25 basis points each in the last quarter of the year, with additional easing expected early next year. This approach indicates a gradual loosening of monetary conditions, which reflects both stability and uncertainty ahead. Changes in the job market are also influencing the overall economy. Signs of strength are being overshadowed by clear slowdowns. Hiring remains positive but has cooled, and job openings are decreasing. The job-seeking process is becoming longer and less predictable, with indicators suggesting more complications. In past cycles, such employment shifts have prompted quick responses from policymakers, but this time the reaction appears to be slower.

Influence of Short Term Expectations

Short-term expectations are affected by external factors, like seasonal adjustments and job absorption through immigration, which may skew monthly data. If these distortions impact payroll growth, they could support earlier rate cuts in the eyes of the market. On the inflation side, the effect of tariffs is diminishing. The earlier phase of passing on costs seems to be in the past. Cooling price expectations come from various sources: the end of pandemic disruptions, more stable consumer behavior, and steadying input costs. This offers clearer insights into future inflation trends. Thus, there is room for careful easing without risking a rise in prices. While the Fed seems more tolerant of keeping rates steady compared to previous years, uncertainties about future leadership and external factors might influence their next move. Questions surrounding Powell’s term add complexity, potentially leading to a more adaptable approach. This situation allows for quick shifts in expectations, depending on incoming data. In the upcoming weeks, it’s crucial to pay attention to short-term indicators alongside longer-term trends. Payroll reports, wage data, and consumer sentiment surveys will likely be analyzed together, rather than in isolation. We must watch for volatility around these important releases. Market dynamics are now sensitive to rate changes and their timing. This means that positioning ahead of important announcements can have an even greater impact than usual. The trajectory is not straightforward; pricing in gradual shifts with varied outcomes could be a more balanced way to approach current signals. Create your live VT Markets account and start trading now.

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