- Goldman Sachs now expects the Fed to cut rates twice in the fall, just days after Fed chair Jerome Powell's July comments dashed investor optimism around a prolonged easing cycle.
- The firm's analysts see a 75% chance for a 25-basis-point cut in September and a 50% chance for a same-size cut in October.
- The likelihood of the US-China trade war extending past the 2020 election will spur additional cuts, the Goldman analysts said in the note.
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Goldman Sachs now expects the Fed to cut rates twice in the fall, an unexpected move after Fed Chair Jerome Powell dented investor optimism around a prolonged easing cycle during his July 31 press conference.
July's adjustment to a 2% rate from 2.25% marked the first interest rate cut since the 2008 financial crisis. After that 25-basis-point lowering - and following Powell's comments - expectations of further easing at the September FOMC meeting dropped to 63%, according to a Bloomberg survey.
However, amid a recent escalation in the US-China trade war, that probability has moved back to 100%.
Even before the Fed's initial cut, there was debate over whether a second cut would be necessary later in 2019. The prospect of two additional cuts was seen as a highly unlikely scenario.
Goldman analysts said they expect the US-China conflict to continue past the 2020 presidential election, and that Powell will continue to slash the interest rate accordingly.
"In light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit, we now expect a third 25-basis-point rate cut in October, for a total of 75 basis point of cuts," Goldman analysts said in the Tuesday note.
The analysts see a 75% chance of a 25-basis-point cut in September and a 50% chance for a similar cut in October. They also noted a 15% chance of a 50-basis-point cut in September, as well as a 40% chance of the Fed not taking action in October.
"By the December meeting, we think inflation numbers running at roughly 2% will lead the Fed to stop cutting," Goldman added.
Stocks fell July 31 after Powell's announcement called the quarter-percentage-point cut a "mid-cycle adjustment," signaling no plans for future adjustments. He later amended his statement and said there's a chance for further easing if economic uncertainty continues.
The trade war intensified Monday when China allowed its currency to breach a psychologically critical level, signaling it's ready for the trade war to continue. The US Treasury Department declared the nation a currency manipulator later that day, the first time the US has made such a statement since 1994.
President Trump suggested on Twitter Tuesday that the trade war may continue into 2020.
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