The Federal Reserve could begin cutting interest rates earlier than previously expected after policymakers made a dovish pivot during their final meeting of the year on Wednesday, according to Goldman Sachs strategists.
The analysts, led by Jan Hatzius, now expect the central bank to trim the benchmark rate by 25 basis points during its meetings in March, May and June. The bank had previously only expected two cuts beginning in the third quarter of 2024.
"In light of the faster return to target, we now expect the FOMC to cut earlier and faster," they wrote in an analyst note on Wednesday.
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The major shift comes after the Fed voted for the third month straight to hold interest rates steady at a range of 5.25% to 5.5%, the highest level in 22 years. But central bankers also hinted that their nearly two-year fight against inflation was coming to an end as they forecast a series of rate cuts in 2024.
In a statement released after the meeting, the policy-setting Federal Open Market Committee acknowledged that "inflation has eased over the past year but remains elevated" and said it would watch the economy to see whether "any" additional rate hikes are needed — a change that indicates many officials believe further tightening is not necessary at this point.
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"We added the word ‘any’ as an acknowledgment that we are likely at, or near, the peak rate for this cycle," Fed Chair Jerome Powell told reporters at the post-meeting press conference in Washington, D.C. "But participants also didn't want to take the possibility of further hikes off the table."
Fed officials also opened the door to multiple rate cuts next year amid cooling inflation and signs the economy is beginning to slow in the face of tighter monetary policy.
Updated quarterly economic projections laid out after the meeting show that a majority of Fed officials who participated in the meeting expect rates to fall to 4.6% by the end of 2024, suggesting there will be at least three quarter-point rate cuts next year. Policymakers also penciled in additional rate cuts in 2025 and 2026.
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No officials see rates rising further next year.
"The FOMC delivered a dovish message at its December meeting," the Goldman economists said.
Other Wall Street banks also shifted their expectations for rate cuts next year. UBS Global Wealth Management expects the Fed will start unwinding policy in May, while JPMorgan Chase and Bank of America project the first rate cut will come in June.
