Goldman Sachs Predicts 2 Rate Cuts In 2024 Due To High Auto Insurance Inflation

Goldman Sachs economist Jan Hatzius predicts that the Federal Reserve will reduce interest rates only twice in 2024, a significant departure from earlier market expectations of up to seven rate cuts. This revised forecast has disrupted the markets, leading to a decline of over 500 points in the Dow Jones Industrial Average during Wednesday's trading session.

The adjustment in Hatzius's projection, from anticipating three 25-basis point rate cuts to just two, follows the release of the March Consumer Price Index (CPI) report, which revealed higher-than-anticipated inflation, particularly driven by increased costs in the auto sector such as insurance and repairs.

"We are delaying our forecast for the first rate cut from June to July. Subsequently, we anticipate cuts to occur quarterly, resulting in two cuts in 2024 in July and November," explained Hatzius.

In March, core CPI experienced a 0.36 per cent rise, slightly surpassing consensus expectations, with much of the upsurge attributed to the automotive industry. Despite private transportation accounting for only 7 per cent of the core, it contributed over a third of the monthly core gain, primarily due to significant increases in car insurance and repair costs.

Investor focus has now shifted to the upcoming March Personal Consumption Expenditures (PCE) data, with Hatzius noting that certain price surges observed in the CPI report, like auto insurance, may not be reflected in the PCE report. Nevertheless, in light of the robust CPI figures, Hatzius has adjusted his expectations for the March PCE report, anticipating a rise of 0.28 per cent, up from the previous estimate of 0.21 per cent.

Goldman's confidence in forecasting only two interest rate cuts for the year is partly based on the Federal Reserve's latest dot plot, which indicates a nearly equal split among policymakers between two and three rate cuts in 2024.

"The FOMC was already closely divided regarding its baseline of three rate cuts for 2024, and we believe the Committee will require a sequence of three stronger inflation readings from January to March balanced by a longer series of softer readings in the following months," Hatzius remarked.