- The world economy has entered a period of "great disinflation," Goldman Sachs said Monday.
- The Federal Reserve is likely to slash interest rates five times in 2024, according to the bank.
Cooling inflation will set the stage for the Federal Reserve to slash interest rates as many as five times next year, according to Goldman Sachs.
The bank's chief economist Jan Hatzius said Monday that the world economy has now entered a period of "Great Disinflation" that will enable policymakers to start cutting borrowing costs in early 2024.
"Global inflation continues to plummet… we therefore now see earlier and more aggressive rate cuts from several major developed market central banks," he wrote in a research note seen by Business Insider.
Goldman Sachs is forecasting that the Fed will slash rates by 25 basis points three times in a row between March and June and then ease twice more over the second half of the year. Traders are also predicting that the central bank will loosen five times in 2024, according to the CME Group's Fedwatch tool.
"We see the committee delivering at least three back-to-back 25-basis-point cuts, probably in March, May, and June," Hatzius said. "Anything less would raise the question 'why bother?'"
Hatzius' latest outlook comes after chair Jerome Powell signaled last week that rate cuts are likely to come sooner and be more swift than the market had previously expected, after the US inflation rate slowed to 3.1% last month.
"The question of when will it become appropriate to begin dialing back the amount of policy restraint in place – that begins to come into view, and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today," he said Wednesday.
Powell's dovish comments sparked a stock-market rally, helping Big Tech mega-caps to extend their stellar gains for 2023 and pushing the Dow Jones Industrial Average to a new all-time high. Equities tend to benefit from rates falling because it becomes cheaper for listed companies to borrow and investors get weaker relative returns by parking their cash in savings accounts.
Meanwhile, the S&P 500 climbed over 2% last week and is now within touching distance of its previous record of 4,797 points. Goldman strategists led by David Kostin responded to Powell's apparent pivot by lifting their end-of-2024 forecast for the benchmark index to 5,100 Monday, implying gains of 8% from its current level.
Hatzius has been one of Wall Street's cheeriest voices this year, consistently predicting that the US will be able to avoid a recession in what would amount to a dream "soft landing" scenario for the Fed.
That's consistently clashed with the outlook put forward by gloomier figures like Morgan Stanley's chief US equity strategist Mike Wilson, who admitted in July that he'd been wrong to write off stocks.
In Monday's research note, he predicted that the economy will log growth of 2% and that the unemployment rate will drop to 3.6% in 2024. Those strong numbers will likely stop Powell and co. from cutting rates more than five times next year, he added.