by AdMaleficent2789
Goldman Sachs expects core inflation to fall enough for the Federal Reserve to start cutting rates in Q2 2024, but economists leave the door open for a higher-for-longer scenario.
By Q2, “we expect core PCE inflation to have fallen below 3% on a year-on-year basis and below 2.5% on a monthly annualized basis, and wage growth to have fallen below 4% year-on-year,” chief economist Jan Hatzius wrote in a note Monday. “Those thresholds for cutting align roughly with the annual forecasts in the FOMC’s Summary of Economic Projections and the conditions at the outset of the last cutting cycle motivated by an intent to normalize from a restrictive policy stance as inflation came down in 1995.”
The Goldman base case is now for cuts to start with the U.S. economy avoiding a recession.
The 2s10s curve has narrowed recently, but is still inverted by around 70 basis points.
“Last year we initially took the view that the FOMC was unlikely to cut until a growth scare emerged, but we softened our stance earlier this year and have since assumed that a convincing decline in inflation would probably be enough to prompt cuts,” Hatzius said. “We made this change in part because Fed officials increasingly emphasized that once inflation came down, it would no longer be necessary or appropriate to keep the funds rate so high relative to estimates of the neutral rate.”
Remember that Goldman sold a bunch a ton of MBS before the 2008 financial crisis that they knew was worthless, then turned around and shorted the same bonds they were selling.