Goldman Sachs (NYSE:GS) is increasingly confident that the Federal Reserve will begin cutting interest rates in September, the Wall Street firm’s economists said, citing recent comments by chairman Jerome Powell.
In his testimony before Congress, Powell refrained from indicating when the first rate cut might occur, stressing that the FOMC requires more favorable inflation data to gain the “greater confidence” needed to start reducing rates.
Yet, he also pointed out risks to the labor market, noting that “unexpected weakening” in this area could prompt the Fed to cut rates as well.
“He said that the labor market has cooled “pretty significantly” and seen “considerable softening,” and as a result the FOMC needs to be “mindful” about the labor market too,” Goldman Sachs highlighted.
Moreover, he repeatedly noted that the risks to the two sides of the Fed’s dual mandate are now “much more in balance.”
Powell’s comments echoed similar remarks made last week at the ECB Forum, where he said that further softening in labor demand could result in significantly higher unemployment.
“We see his comments over the last two weeks as dovish, and alongside the better recent inflation news and the continued rise in the unemployment rate, they have increased our confidence in our forecast that the FOMC will deliver the first cut at its September meeting,” Goldman economists said in a note.
The Fed boss also touched on the neutral rate, describing it as an "empirical question" for the FOMC. He remarked that the current policy rate of 5.375% feels “restrictive but not intensely restrictive,” implying that the neutral rate has likely risen somewhat compared to its level in the last cycle.