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Goldman Sachs Group Inc (NYSE:). economists predict Federal Reserve officials will cut interest rates at each of their next two meetings — in part because of a desire to keep bond markets calm.
Having lowered their benchmark rate by 25 basis points to 2-2.25% in July, policy makers will execute reductions of the same size in September and October with “risks tilted toward more and/or bigger cuts,” Jan Hatzius and Sven Jari Stehn said in a report released late Tuesday.
Goldman’s Hall of Mirrors
As well as uncertainty over the U.S.-China trade war, the economists rationalize their call by arguing the central bank is in a “hall of mirrors” in which officials place greater weight on bond-market pricing when making decisions than historically.
That’s because policy makers “worry more about the consequence of disappointing market expectations for cuts and partly because some of them put a significant amount of weight on bond-market signals (such as the slope of the yield curve and breakeven inflation) in gauging the outlook for growth and inflation,” according to the report.
The result is a “positive feedback loop” as bond traders push for looser monetary policy which prompts a more dovish central bank, they said, adding that the pattern only ceases when economic data suggest further easing is inappropriate.
At the same time, the Goldman team expressed skepticism that an inverted yield curve is a reliable predictor of recession because of the Fed’s greater emphasis on the bond market.
Investors in the money market are betting that the Fed will cut its benchmark rate by 25 basis points in September. Traders are factoring in a 92% chance of a further 25-basis point reduction in October.
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