- Fed minutes show most officials support at least two rate cuts in 2025, despite tariff-related inflation concerns.
- Goldman Sachs now expects the first cut in September, citing weaker-than-expected inflation from tariffs.
- Polymarket traders currently assign a 50% chance to a September rate cut, with July seen as unlikely.
Yesterday’s Fed minutes revealed that at least some of the FOMC members are in favor of at least 2 interest rate slashes still in 2025.
After all, the overall feeling in financial markets is that a rate cut has been long overdue. The Fed, which had brought interest rates to a 13-year high during the post-COVID era, began to slowly trim interest rates from 2023 onward, but suddenly stopped doing so in 2025.
One can only make assumptions as to why the Fed stopped cutting rates by December 2024, right after three consecutive slashes. The arrival of Donald Trump, a notoriously polarizing figure, in the White House could have had an effect on the Federal Reserve’s decision-making.
A few months later, Trump’s new foreign trade policy, which includes hefty tariffs to settle “trade deficits” with nearly all other nations, is decisively another reason that led the Fed to become more risk-averse.
At the time, it was believed that the new policy would introduce inflationary pressures due to import costs, likely complicating the Fed’s inflation outlook. While this can still be true to some degree, recent economic data points to inflation likely staying range-bound to the Fed’s 2% target.
However, as the dust settles and FOMC members assess that the impact from tariffs may not be as significant as once it was thought, the market is starting to see early signs of a flip into laxer monetary policy.
A recent analysis by Goldman Sachs Research economists now predicts a rate cut three months earlier than previously expected. Now, the analysis firm expects to see a rate cut as soon as September.
These expectations are not set in stone, however. Chief US economist at Goldman Sachs, David Mericle, claims that odds are “somewhat above 50%” for a September interest rate cut. By the end of the year, Goldman Sachs Research expects another slash, leading the current interest rate to 3.5%.
Blockchain-based prediction platform “Polymarket” is also reflecting on this trend. Now, traders estimate a 48% chance that interest rates will come down by September.
Next Tuesday, the release of the Consumer Price Index for June, now two months after “liberation day” tariffs, will serve as a key indicator of whether inflationary pressures really are holding on closer to the Fed’s target.
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