Goldman Sachs: Fed Likely to Delay Interest-Rate Cuts

Goldman Sachs warned Monday that the Federal Reserve is likely to delay planned interest-rate cuts, citing recent economic data that point to higher-for-longer policy than many investors expect.

In a research note, Goldman Sachs economists wrote that persistent core inflation above the Fed’s 2% target, robust consumer spending and a tight labor market have reduced the odds of rate cuts in the early part of the year. The bank said the timing of any easing now looks more likely to fall later in the year or beyond.

Goldman’s assessment highlights U.S. core inflation measures that remain elevated, labor-market indicators showing low unemployment and steady job growth, and household balance sheets that support continued consumption. The note added that recent fiscal support and a rebound in services activity have contributed to demand pressures.

The bank warned markets that had priced in earlier cuts could see adjustments. A shift in expectations toward later easing would tend to lift short-term Treasury yields and keep borrowing costs higher for mortgages, corporate loans and auto financing. Money markets and bond investors use major banks’ research when shaping expectations for the pace and timing of policy changes.

Goldman emphasized that Federal Reserve decisions remain data dependent. The firm wrote that if upcoming inflation reports and labor-market releases show a faster-than-expected decline in price pressures or a marked slowdown in hiring, the Fed could move toward easing. Without that evidence, policymakers are likely to hold rates at current levels for longer to avoid reversing progress on inflation.

The note pointed to services-sector inflation and wage growth as key variables for the timing of any cuts. Services inflation tends to be stickier and is sensitive to labor costs, the economists observed. The research also cited global influences such as energy prices and supply-chain dynamics as potential upside risks to domestic inflation.

Background: The Fed raised interest rates beginning in 2022 to slow inflation and moved policy to the highest levels in more than a decade. Fed officials have signaled they will wait for clearer signs that inflation is sustainably back at target before reducing rates. Goldman’s latest analysis implies markets may need to push out the expected timing of rate reductions.