Goldman Sachs Predicts Fed Will Cut Rates by Half Point in March
Goldman Sees 50 bps Fed Cut in March, Coordination Possible
(Bloomberg) -- Goldman Sachs Group Inc. economists said they now expect the Federal Reserve to cut its key interest rate by 50 basis points this month and flagged the possibility of a coordinated move with other central banks.
Revising their Fed forecast for a second time in three days amid mounting risks from the coronavirus to the U.S. economy, the Goldman economists predicted the Fed to act at or before its March 17-18 meeting. On Friday they forecast a 25 basis point reduction at that gathering, but now think the Fed may not wait until then to ease monetary policy.
“The risk is on the downside, at least in terms of timing,” the Goldman economists led by Jan Hatzius said in a report to clients on Sunday. “Specifically, we see a good chance that the easing we expect over the next several weeks occurs in coordinated fashion, perhaps as early as the coming week.”
Behind Goldman’s change in outlook: Fed Chairman Jerome Powell’s Friday statement that the Fed would “act as appropriate” to support the U.S. economy and the news Saturday that Chinese manufacturing activity had plunged to a record low in February.
“Powell’s statement on Friday suggests to us that global central bankers are intensely focused on the downside risks from the virus,” the economists said. “We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move.”
Central banks haven’t cut rates in a coordinated way since October 2008 when the Fed and others acted together as the collapse of Lehman Brothers Holdings Inc. triggered the global financial crisis.
Goldman said the Fed would ultimately cut its main rate by 100 basis points in the first half of the year, up from the 75 basis points it anticipated Friday.
Global Easing
It also forecast rate cuts totaling 100 basis points from Canada, 50 basis points from the central banks of the U.K. and Australia and 10 basis points from the European Central Bank among other moves.
While some economists question how much easier monetary policy will help economies struggling with a health emergency and damaged supply chains, Hatzius’s team said “central bankers will still want to do their part to support the economy, especially at a time when few of them worry about inflation rising too much.”
The Goldman call for the Fed is among the most aggressive of those made by Wall Street economists in recent days after virus fears sparked the biggest week of U.S. stock declines since the financial crisis.
Upended Forecasts
That slump upended previous forecasts for the Fed to be on hold this year after lowering its benchmark three times in 2019 to a range of 1.5% to 1.75%. Until Powell’s statement Friday, Fed officials had signaled it was too soon to consider responding to the outbreak.
As of Friday, Bank of America Corp. was also projecting a 50 basis cut this month, while Barclays and Citigroup Inc. were predicting initial moves of 25 basis points followed by others.
The worry of economists and traders is the world economy is now on course for its weakest year since at least 2009 as the deadly virus spreads from China. Hatzius’s team had already said Friday that it reckoned the global economy will contract in the current and subsequent quarters before rebounding.
To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net;Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull
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