Goldman Sachs postpones US interest rate cut to 2026 | Analysis and implications

Goldman Sachs, one of the world's leading financial institutions, has announced a radical revision of its forecasts for the US Federal Reserve's monetary policy, now expecting the first interest rate cut to be delayed until late 2026.

In a report released on May 8, Fed economists explained that persistent inflationary pressures, which have proven more robust than initially anticipated, are the primary reason for this shift. According to the report, the core personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, is expected to remain near 3%, significantly above the official target of 2%. Analysts attribute this sustained inflation largely to the transmission of higher energy costs to the prices of other goods and services, thus delaying the creation of conditions conducive to initiating a monetary easing cycle.

The general context and the Federal Reserve's battle against inflation

This revision in forecasts comes amid a protracted battle by the Federal Reserve to curb inflation, which reached a four-decade high in 2022. In response, the Fed launched a series of sharp and successive interest rate hikes beginning in March 2022, the fastest pace of monetary tightening in decades. This policy aimed to cool the economy and reduce demand to curb rising prices. At the start of 2024, there was widespread optimism in the markets that the Fed had succeeded and that several rate cuts were imminent. However, economic data released in recent months, showing a strong labor market and persistent inflation, has dampened this optimism and forced analysts and investors to reassess their expectations.

The importance of the decision and its expected effects

The decision to postpone interest rate cuts has far-reaching implications both domestically and internationally. Domestically, continued high interest rates mean that borrowing costs for consumers and businesses in the United States will remain elevated. This will directly impact mortgages, auto loans, and credit cards, potentially curbing consumer spending, a key driver of the US economy. It may also force businesses to delay their investment and expansion plans due to the increased cost of financing.

Internationally, continued high interest rates in the US strengthen the US dollar against other currencies. This makes goods imported into the US cheaper, but conversely, it increases the cost of imports for other countries and may contribute to exported inflation. It also puts significant pressure on emerging economies with dollar-denominated debt, as servicing that debt becomes more expensive. Furthermore, central banks around the world closely follow the US Federal Reserve's decisions, and this delay may prompt them to maintain tight monetary policies for a longer period to prevent capital outflows.

Economists at Goldman Sachs concluded that any interest rate cut this year is contingent on two key conditions: a significant decline in monthly inflation readings after the oil price shock subsides, coupled with a further slowdown in the labor market – conditions that now seem more distant than previously thought.