Analysts from Goldman Sachs told clients this week that it’s basically a done deal that the Federal Reserve will cut its benchmark interest rate later this month.
In the report, the Goldman Sachs analysts say that there’s a 90% chance of a rate cut coming out of the next meeting of the Federal Open Market Committee, which is set for July 30-31.
According to the analysts, there’s a 75% chance the FOMC cuts rates by 25 basis points (0.25%), a 15% chance the FOMC cuts rates by 50 basis points (0.50%), and just a 10% chance that the FOMC leaves rates unchanged.
If the Fed does cut rates, it would be the first time it’s lowered the benchmark rate since it began raising rates in late 2015 after nine years of a 0% federal funds rate.
Since then, the FOMC has raised rates on several occasions, but has left rates unchanged throughout 2019, having increased the federal funds rate by 25 basis points to a targeted range of 2.25% to 2.5% in December 2018.
But as this year has gone on, the Federal Reserve began to signal that a rate cut may be coming at some point this year.
After last month’s FOMC meeting, the Fed removed the word “patient” from its statement, indicating that a rate cut may be coming as soon as July. In the statement, Fed officials said they now viewed economic activity progressing at a “moderate” rate rather than the “solid” pace cited at their last meeting.
According to Goldman Sachs, new information released this week by the Fed coupled with this week’s Congressional appearance by Fed Chairman Jerome Powell has moved the likelihood of a rate cut later this month to a near certainty.
Previously, Goldman Sachs analysts pegged the odds of a July rate hike at 75%.
“The minutes of the June FOMC meeting (which were released Wednesday) indicated a stronger case for rate cuts, with participants noting that uncertainty and downside risks had increased ‘significantly,’” Goldman Sachs wrote in its report.
“‘Many’ participants said that inflation expectations could remain ‘somewhat below’ the 2% target, and that continued weakness in inflation could to lead to further deterioration in expectations. ‘Many’ judged that cuts in the near term would be warranted should uncertainty continue to weigh on the economic outlook, while only a ‘few’ stated that easier policy risked overheating the labor markets and fueling financial imbalances,” Goldman Sachs continued. “While the June minutes also revealed that the staff delivered a high-level presentation on the possibility of an overnight repo facility, a consensus on its ‘potential net benefits’ has not yet been reached.”
Beyond that, Goldman Sachs cites Powell’s remarks before Congress as a further indication that a rate cut is coming.
“Chair Powell offered a somewhat upbeat baseline view of growth but nonetheless argued that uncertainty ‘continues to weigh’ on the outlook,” Goldman Sachs’ analysts wrote. “In our view, this was a strong signal that the trade truce with China and the strong June job reports have not derailed the case for a July rate cut.”
The analysts also wrote that Powell’s continued emphasis on “muted” inflation and Powell’s suggestion that in an economic environment like the current one, “crosscurrents” like slower global growth or trade policy uncertainty, are likely indications that more accommodative monetary policy, meaning lower interest rates, is on the way.
Given those factors, Goldman Sachs analysts say the smart bet is to expect a cut in July and another in September.
As for the impact of a Fed rate cut on mortgage interest rates, according to the newest data from Freddie Mac, rates are currently holding steady below 4%, as investors seem to believe that the Fed could soon ease its monetary policy.
“The recent stabilization in mortgage rates reflects modestly improving U.S. economic data and a more accommodative tone from the Federal Reserve to respond to the rising downside economic risk from trade tensions and soft global economic data,” Freddie Mac Chief Economist Sam Khater said. “On the housing front, the latest weekly purchase application data suggests homebuyer demand continues to rise, which is consistent with the slowly improving real estate data from the last two months.”