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Goldman Sachs says if the Fed nails a soft landing, don’t expect interest rate cuts until something goes wrong

Fed Chair Jerome PowellFederal Reserve Chair Jerome Powell.

  • Goldman Sachs said the Federal Reserve won’t cut interest rates if it pulls off a soft landing.
  • The only scenario in which the central bank will slash rates is if something goes wrong.
  • Analysts at the bank expect the Fed to hike rates by another 75 basis points in November.

If the Federal Reserve pulls of a soft landing, it won’t cut interest rates until something goes wrong, according to Goldman Sachs.

The note came after the Fed hiked the benchmark interest rate Wednesday by 75 basis points for a third consecutive meeting to pull down inflation running through the US economy. Data showed prices climbing 8.3% through August, a number that went beyond what economists were expecting.

Market spectators worry that its aggressive monetary policy could tip the US economy into a recession and some, like “Bond King” Jeff Gundlach, have urged officials to slow down on the pace of rate hikes.

Others see a soft landing, which is when inflation cools down to the Fed’s 2% target while the economy avoids a recession. If this scenario is achieved however, the Fed is unlikely to cut interest rates, and instead wait until something goes wrong in the economy before taking action, according to Goldman Sachs.

“In our view, if rate hikes solve the inflation problem without a recession, the FOMC would most likely wait until something goes wrong to cut rather than cutting just for the sake of returning to neutral,” analysts led by Jan Hatzius said, adding that the Fed does not have enough confidence in its neutral rate estimate of 2.5% for it to cut rates.

Analysts at the bank forecasted that the Fed will hike rates by 75 basis points at its next meeting in November and another 50 basis points in December, with the fed funds rate seen rising to 4.6% by year-end. But the path of the funds rate in 2023 will depend on two issues, they added.

“The first is how quickly growth, hiring and inflation slow. While there are risks in both directions, we see more risk that a higher peak rate will be needed to reverse overheating than that the Fed will stop earlier,” the bank said.

“The second is whether FOMC participants will really be satisfied with a sufficiently high level of the funds rate and willing to slow or stop tightening while inflation is still uncomfortably high,” they added.

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