Recent comments from Federal Reserve officials indicate that they are likely to keep interest rates steady at their upcoming meeting. However, the likelihood of a rate cut for the first time has become more probable, according to economists at Goldman Sachs.
The main factor driving the Federal Open Market Committee towards cutting interest rates is positive inflation data in May and June. Goldman Sachs economists expect July inflation data to follow the same trend, and the remaining course of personal consumption expenditure inflation numbers is expected to turn negative again.
Among other reasons behind the shift in tone from Federal Reserve officials is the rising unemployment rate, which increased by 0.1 percentage points over the past three months, reaching 4.1%. This represents an increase of 0.7 percentage points from its lowest level, or nearly 0.5 percentage points on a three-month average basis.
Goldman Sachs economists noted that “the labor market is currently in good shape. It is almost as tight as it was before the pandemic, a period that achieved a highly favorable balance between full employment and inflation close to the target.”
The Goldman Sachs team added that cutting interest rates sooner rather than later could help ensure this outcome. They expect that these recent trends in data will prompt the Federal Open Market Committee to revise its statement at this week’s meeting in ways that indicate a rate cut at the next meeting in September.
In the near term, economists said the main risk is that the Federal Open Market Committee may cut interest rates at a faster pace, possibly in consecutive meetings, if labor market data weakens more than expected.
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