FED Rate Cut Tipped at 0.25% rate cut in June say Goldman Sachs

December 14, 2023 - Written by Frank Davies

STORY LINK FED Rate Cut Tipped at 0.25% rate cut in June say Goldman Sachs

US Dollar Slumps on Fed Pivot Towards Rate Cuts, EUR/USD Exchange Rate Nears 1.09

Although the Federal Reserve policy decision was in line with expectations, the interest rate forecasts were more dovish than expected and Fed Chair Powell did little to push back against market pricing.

Indeed, he was significantly more dovish than the previous meeting with greater confidence that interest rates have peaked.

The dollar posted sharp losses on the new set of interest rate forecasts and continued to lose ground during Powell’s testimony.

The Euro to Dollar (EUR/USD) exchange rate jumped to 10-day highs near 1.0900 while the Pound to Dollar (GBP/USD) exchange rate broke above the 1.2600 level.

USD/JPY also slumped to lows just below the 143.00 level.

The Federal Reserve held interest rates at 5.50% which was in line with consensus forecasts and the vote was unanimous.

According to the statement; “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

It again noted that the Committee remains highly attentive to inflation risks, but added that inflation has eased over the past year.

It contained the phrasing that; “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

As far as the projections of interest rates by individual committee members is concerned, the median rate for 2024 was cut to 4.6% from 5.1% previously while the 2025 projection was cut to 3.6% from 3.9%.

Following the statement, markets priced in close to 150 basis points of rate cuts for 2024 from 115 basis point previously.

None of the members forecast that interest rates would need to increase further and the median projection was for rates to be cut three times in 2024.

These projections were more dovish than expected and there was a jump in Treasuries with lower bond yields while equities posted strong gains.

There were also strong buying for precious metals with gold close to 2% higher.

Markets moved to price in over a 60% chance of a cut in March and close to 90% in May from 75% previously.

In this environment, the dollar dipped sharply following the release.

Fed Chair Powell stated that the Fed would proceed carefully while there has been a substantial slowdown in economic activity.

Powell also commented that there was a general expectation that rate cuts will be a topic of conversation going forward.

Powell also commented; “People generally think that we’re at or near that. And I think it’s not likely that we’ll hike, although we don’t take that possibility off the table.”

The dollar continued to lose ground during Powell’s press conference as pressed significant dovish buttons while there was only a very limited push back against market expectations.

TraderX analyst Michael Brown commented "A marginally more dovish-than-expected 'dot plot' doesn't exactly provide the pushback on market pricing and looser financial conditions that most had been expecting."

According to Jon Maier, chief investment officer of Global X; “The market is celebrating that the Fed dots moved closer to the markets,” he said. “This isn’t just a mere decision to maintain current rates; it’s a commendation for an economy that appears to be aligning with the Fed’s long-term objectives.”

Goldman Sachs investment officer Whitney Watson stated; “We foresee the initiation of a cutting cycle with a 0.25% rate cut in June, with the Fed following a measured approach to reach a policy rate of 4.25-4.5% by the end of 2024 — slightly below the updated median policymaker projection.”

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TAGS: Euro Dollar Forecasts