Goldman expects Fed cutting rates this year

Bloomberg

Goldman Sachs Group Inc. now expects the Federal Reserve to cut interest rates by 25 basis points in both July and September and isn’t ruling out the possibility of a bigger move of 50 basis points “if the news flow disappoints.”
The need to get ahead of the bond market could be another reason to push Fed officials towards a bigger reduction in rates, economists including Jan Hatzius wrote in a note dated on June 19. The firm had previously seen no change in rates for this year.
Noting that the Fed’s message was dovish even relative to market expectations, the analysts said the most important takeaways from the meeting were the “magnitude” of the declines in the dots, the “starkness” of the change in Chair Jerome Powell’s tone relative to the previous press conference in May, and the unqualified “will act as appropriate” phrase in the statement.
The baseline forecast for now is for the Fed to cut in July by 25 basis points, rather than 50 basis points, as larger cuts are usually saved for risks of an economic recession, according to the note.
However, with Federal Open Market Committee pa-rticipants seemingly increasingly influenced by bond market expectations, that could support a bigger cut.
“The bond market is already discounting a 32 basis points rate cut at the July meeting, and if expectations continue to creep towards 50 basis points, the FOMC might well deliver a 50 basis points cut for fear of disappointing the market, even if the economic data do not paint a particularly worrisome picture,” the economists wrote.
Goldman Sachs Group Inc. and Morgan Stanley improved on last year’s poor results in the first round of the latest Federal Reserve stress tests, a sign they may have more flexibility to boost payouts to shareholders.
In figures posted by the Fed, the pair didn’t come as close to breaching regulatory minimums as they did last year, offering hope they will escape limits on dividends and stock buybacks imposed back then.
All 18 banks in the exam demonstrated an ability to withstand a hypothetical financial shock. The second and final round next week determines whether firms win approval to boost capital payouts.