Goldie Does Not See the “Insurance” Rate Cut Coming


Goldman Sachs (NYSE:GS) economists said they are skeptical of “insurance” US interest rate decreases from the Fed to forestall possible slowing in US economic growth due to global trade tensions.

A surprise escalation in trade tensions between Washington and Beijing since May, together with low inflation, have spurred bets among traders the Fed may lower Key lending rates by 0.75 percentage points by year-end.

“However, we think the hurdle for such cuts is likely to be higher than widely believed,” Goldman economists wrote in a research note published Sunday.

The 24 Top Wall Street firms aka primary dealers, that do business directly with the Fed, anticipate the Fed would lower Key borrowing costs beginning this Summer.

Goldman Sachs Group Inc and a few other primary dealers have stuck with calls that the Fed would refrain from decreasing rates until there is evidence of significant deterioration in business and consumer activities.

Goldman economists said the 0.75 point in rate cuts in Y 1995-1996 and 1998, which some analysts point to as recent examples of preemptive policy easing from the Fed, were responses to data “rested at least as much on observable deterioration as on an insurance motive.”

They said another assumption for insurance rate-cuts is that Fed officials could reserve the moves once the risk abates.

“However, the greater political scrutiny of Fed hikes now, especially with a Presidential election approaching could make this harder to do in Y 2020, so that overly hasty insurance cuts now might increase the risk that the funds rate gets stuck at too low a level if the economy remains resilient,” they wrote.

On Friday, US short-term interest rates futures implied traders see about a 58% chance the Fed would lower short-term rates by 0.75 point by year-end, up from 54% a week earlier and 7% a month ago, according to CME Group’s FedWatch too.

FOMC members will meet Tuesday and Wednesday where analysts widely expect they would pave the way for possible rate cuts later this year.

Interest rates futures suggested traders priced in a 23% probability the Fed would lower rates week, compared with 25% a week ago and 13% a month earlier, the CME FedWatch program showed.

We wait, We see.

Stay tuned…