The firm construed Powell’s qualification of the labor market as suggesting additional weakness beyond the rise in the unemployment rate.
Close on the heels of the Federal Reserve’s September meeting, in which the central bank reduced the benchmark interest rate by 25 basis points as expected, investment banking giant Goldman Sachs reaffirmed its view concerning the monetary policy trajectory.
In a note released late Wednesday, Goldman Chief Economist Jan Hatzius said the firm expects two additional quarter-point reductions before the end of the year, according to the Fly. The rate-setting committee of the Fed, named Federal Open Market Committee (FOMC), would meet two more times this year: Oct. 28-29 and Dec. 9-10.
Hatzius said he expects two more cuts to be incoming in 2026, taking the Fed funds rate to 3%-3.25%, adding that Goldman’s rate path expectation tilts a “bit more dovish” than what the market has priced.
Goldman’s rate outlook could warm Wall Street, which has expressed uneasiness over Chair Jerome Powell’s slightly hawkish tone at the press conference and the wide dispersion seen in the dot plot constructed based on the expectations of Fed officials, including non-voting members.
On Wednesday, the S&P 500 Index and the Nasdaq Composite Index pulled back in late-afternoon trading before settling modestly lower. Nevertheless, the SPDR S&P 500 ETF (SPY), an exchange-traded fund (ETF) that tracks the S&P 500 Index, and the Invesco QQQ Trust (QQQ) have gained 13.14% and 15.71%, respectively, for the year.
On Stocktwits, retail sentiment toward the SPY ETF and the QQQ ETF has remained ‘bullish’ by early Thursday, although the message volume has improved to ‘high’ levels.
The Goldman economist based his expectations on his reading of the post-meeting policy statement, which he said added dovish language, similar to that used last September. He also construed Powell’s qualification of the labor market as suggesting additional weakness beyond the rise in the unemployment rate.
Comerica Chief Economist Bill Adams, however, thinks “the Fed is in a pickle, with inflation pulling them one way and a softening job market pulling the other.”
In his press conference, Powell emphasized the central bank’s tough ask of balancing its goal in an unusual situation, although he expressed concerns about the weakening labor market. Earlier in his speech, he called the September cut a “risk-management” cut, with the market interpreting the phrase as meaning “meeting-by-meeting” decision on future cuts.
But Evercore ISI Vice Chairman Krisna Guha said the markets misread Powell, adding that a risk-management cut suggests the central bank stands ready to move without waiting for more weakness, according to MarketWatch.
On future rate moves, the chair said a December rate cut is not a given. “I don’t think an October cut locks in a move in December,” he said.
Economist Peter Schiff called Powell’s statement that inflation will return to the central bank’s 2% target in two years as “wishful thinking disguised as a legitimate forecast.”
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