The rumors that the Federal Reserve will soon likely cut interest rates are growing at an exponential pace. Indeed, Goldman Sachs economists have predicted that the Federal Reserve will likely cut interest rates in the second quarter of next year regardless of whether the U.S. economy enters a recession.
“The cuts in our forecast are driven by this desire to normalize the funds rate from a restrictive level once inflation is closer to target, not by the recession,” Goldman Sachs Chief U.S. Economist David Mericle wrote.
Goldman Sachs economists believe that the Federal Reserve will start cutting interest rates by the end of next June, with a gradual, quarterly pace of reductions from that point. They expect the Fed to start cutting rates by 25 basis points each quarter, with the goal of bringing the federal funds rate down from 5.75% to 3% by the end of 2024.
Goldman's economists are predicting rate cuts because they believe that inflation will continue to decline in the next few months. They expect core inflation, which excludes food and energy prices, to slow to 2.5% by the end of 2023. They also believe that the labor market is starting to cool, which will help to bring down wage growth.
If Goldman's economists are correct, it would mark a significant shift in monetary policy. The Fed has been raising interest rates aggressively in an effort to combat inflation, which has reached a 40-year high. However, if inflation continues to come down, the Fed may need to ease off on its tightening cycle and start applying quantitative easing (QE).
The implementation of quantitative easing will have important implications for financial markets. First, QE is applied when the Federal Reserve lowers interest rates. Hence, the Federal Reserve buys assets and increases the supply of money in the economy. This can make it cheaper for businesses to borrow money and invest, and it can also make it easier for consumers to borrow money and spend.
More importantly, QE can also lead to higher asset prices, as investors seek out assets that offer higher returns in a low-interest rate environment. This can drive up the prices of stocks, bonds, and other assets. Thus, driving wealth inequality between those who have their money tied to financial markets, and those who only have their money tied to their savings account.
Indeed, it is essential to stress that once interest rates are cut, inflation will increase again, which means that the purchasing power of the American consumer will further decrease. Thus, those who have their money tied to their investments will see their wealth surge while those who have their money tied to their savings account will see their wealth stagnating.
The other major problem with QE is that it distorts markets. Actually, it can create artificial demand for assets and drive up prices beyond what is justified by fundamentals. This can make it difficult for investors to make informed decisions about where to invest their money.
Overall, the impact of QE on financial markets is mixed. It can have positive effects, such as lower interest rates and higher asset prices. However, it can also have negative effects, such as increased volatility and distorted markets.