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Investing.com — According to insights from Goldman Sachs, market participants may be overlooking critical lessons from the economic climate of 2019 as they approach the forthcoming January meeting of the Federal Open Market Committee (FOMC).
The investment bank has expressed in a recent note that this meeting is unlikely to deliver groundbreaking information. Their analysts predict that while the statement might reflect some stabilization in the labor market, it will not provide definitive guidance regarding potential future rate adjustments or the March meeting.
Strategists emphasize, “We will be attentive for indications on whether the anticipated further decline in inflation in the upcoming months could pave the way for rate cuts, and how firmly the leadership holds the view that the current funds rate remains ‘meaningfully restrictive’ and not an ideal stopping point.”
In addition, they are expecting commentary on how the FOMC plans to manage the uncertainties linked to potential tariff increases and their probable effects on market prices.
Looking further into the future, specifically targeting 2025, Goldman Sachs maintains an encouraging outlook for the economy. They predict advancement toward the 2% inflation target, a gradual recovery in labor market conditions after a potential softening in 2024, and GDP growth that exceeds industry consensus.
The firm foresees upcoming inflation reports indicating a continued descent in the year-over-year rate. Given the expected economic landscape, they believe that rate cuts would be reasonable, though not absolutely necessary.
Further assessments suggest that the FOMC’s decisions will significantly pivot on how the committee addresses tariffs. Goldman Sachs’ baseline scenario assumes that any inflationary pressures from tariffs would be modest, estimating an increase of only 0.3 percentage points. Such an uptick would not necessarily trigger a broad inflation rise, potentially allowing for some flexibility in rate policies.
Despite this, FOMC members may still hold back from implementing rate cuts due to uncertainties regarding potential blame for any inflationary fallout stemming from tariffs.
The Wall Street firm has analyzed past transcripts and assessments from Fed meetings during the trade tensions of 2018-2019 to inform their expectations for the current economic environment. They found that past Fed officials and staff had taken a relatively calm view toward the influence of tariffs on inflation, aligning with Goldman Sachs’ current analysis.
Additionally, while the earlier estimates by Fed staff regarding the GDP impact from extensive tariff proposals were significant and exceeded Goldman’s forecasts, FOMC eventually did opt for rate cuts. However, some members expressed skepticism about whether the impact of tariffs warranted such a response in monetary policy.
For the current economic cycle, Goldman Sachs anticipates two rate reductions, each by 25 basis points, occurring in June and December, along with another potential cut in 2026. This outlook is based on the expectation of continued declines in inflation and a resilient labor market.
Nevertheless, they caution that pinpointing the exact timing of these cuts remains challenging due to unpredictable economic factors and the FOMC’s tentative stance regarding tariffs.
Strategists assert, “We are more convinced that market pricing, as an expression of possible Fed paths in the coming years, is overly hawkish, particularly regarding the likelihood of rate hikes.”
They express doubt that any new policies from the administration will be sufficiently inflationary to compel the FOMC to raise rates from their current stance, which is already considered restrictive.
Concluding their analysis, they note, “We are concerned that the lessons from 2019—where tariff-related uncertainties impacted the equity markets and led the FOMC to implement ‘insurance cuts’—are being overlooked.”
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