Goldman Sachs: Fed to Pause Rate Hikes in June, Raise by 25 Basis Points in July, Cut Rates Next Year.

Goldman Sachs predicts that the Federal Reserve will hold steady at its June FOMC meeting and then raise interest rates once more in July.

In a report on Thursday, Goldman Sachs analyst Jan Hatzius predicted that "the Federal Reserve will pause in June and then raise interest rates by 25 basis points in July, while raising its GDP and core inflation expectations for 2023."

Goldman Sachs believes that pausing interest rate hikes is a cautious approach:

The lagged effects of rate hikes and the uncertainty of the impact of bank credit tightening increase the risk of over-tightening, and Federal Reserve members have sent a clear signal to pause interest rate hikes.

At the same time, Goldman Sachs pointed out that the downside risks to the economy have decreased:

Although economic activity data sends conflicting signals, we now have a full understanding of the pressure on the banking industry and are confident that it will not bring a recessionary blow. For these reasons, we will

Although the US economy is still on a soft landing trajectory, there is still a long way to go to fight inflation. Goldman Sachs further pointed out:

So far, the decline in core PCE has been lower than expected, and it is expected to slow significantly later this year, while inflation expectations are normalizing, showing signs of cooling inflation.

"We expect the latest Economic Outlook Summary to raise its 2023 GDP forecast (up 0.6% to 1%), lower its unemployment rate forecast (down 0.4% to 4.1%), and raise its core PCE forecast (up 0.2% to 3.8%)."

Overall, Goldman Sachs expects the Federal Reserve to raise interest rates by 25 basis points in July, with a final rate forecast of 5.25%-5.5%. Then, in 2024, interest rates will be cut by 87.5 basis points to around 4.5%, and in 2025, they will be cut by another 112.5 basis points to 3.375%, with the mean of the long-term or neutral interest rate rising slightly.