Goldman still expects two Fed rate cuts this year despite hawkish dot plot

The June dot plot surprised the markets with a more hawkish stance, showing a median projection of one rate cut in 2024, contrary to the two cuts that consensus had expected.

However, in his Wednesday press conference, Fed Chair Jerome Powell said that many participants viewed the decision as a close call, hinting that both outcomes are still possible.

Following the softer-than-expected SPI report, the market-implied probability of a rate cut by September initially increased from 59% to a peak of 85% but then retreated to 65% after the FOMC meeting.

“We continue to expect a first rate cut in September and a second cut in December,” Goldman economists said in a note.

“Our 2024 inflation forecast is now a touch below the FOMC’s, which Chair Powell characterized as “fairly conservative.” With two better rounds of inflation data now in hand, we think that if the next three rounds are in a similar range, the leadership is likely to push through a cut in September,” they added.

Despite the baseline of one rate cut at the FOMC meeting, there were subtle indications of “sympathy for cutting” in response to progress on inflation, economists noted.

They highlighted that FOMC's statement was revised to note "modest" instead of "a lack of" progress toward the 2% target. Chair Powell, in his opening remarks, emphasized that inflation has dropped from a peak of 7% to 2.7%, stressing the cumulative progress.

Powell made several other important remarks during his speech. He noted that labor market data would need to be worse than expected to justify a rate cut, given the FOMC’s increased unemployment and NAIRU estimates.

Moreover, the central bank chair downplayed the importance of neutral rate estimates, which rose to 2.75% today, in policy decisions. Lastly, Powell also mentioned that the next framework review, starting late this year, will focus on the Fed’s communications strategy.