We 'definitely' won't see the Fed cutting interest rates this year but it will pull off a soft landing, Goldman Sachs strategist says

• The Federal Reserve definitely won't cut interest rates this year, a top Goldman Sachs strategist said.
• Whether or not the Fed will cut rates in the first or second quarter of 2024 is still 'up for debate,' Lotfi Karoui told CNBC.

Stock market investors shouldn't expect the Federal Reserve to reverse course and start cutting interest rates this year, according to a top Goldman Sachs strategist.

But it will pull off a "soft landing" and bring inflation down without the US economy slipping into a recession, Lotfi Karoui told CNBC on Thursday.

"No pivot. Certainly no cuts in 2023," said Karoui, the Wall Street bank's chief credit strategist.

"I think first quarter, second quarter of 2024 is up for debate, and to a large extent it will depend on where inflation settles. But definitely no cuts in 2023," he added.

US stocks ended mixed on Wednesday after minutes from the Fed's last meeting showed that the central bank is highly likely to continue with its tightening, and that some policymakers favored a larger, 50-basis-point rate hike this month rather than the 25-basis-point increase that was eventually announced.

Demand for stocks typically falls as interest rates rise, as higher borrowing costs weigh on corporate finances and tend to have a negative impact on their future valuations. Also, rising rates boost returns from savings accounts and bonds, adding to their appeal as alternative options for investors to park their cash.

The risk of recession also typically hurts demand for equities, as a severe economic downturn can weaken the performance of companies and affect their valuations.

Goldman Sachs expects a 25% chance of a recession happening within the next year, which is below the general consensus of 65% but higher than the long-term average of 15%, according to Karoui.

Karoui expects the US economy to experience a "soft landing" - meaning a mild slowdown - as opposed to a "no landing" scenario where the economy continues to expand, but faces the risk of further central bank monetary policy tightening ahead.

"We still have a lot of work to do in terms of rebalancing the labor market, making sure that this joint downward trajectory of price and wage inflation is here to be sustained for the next couple of quarters or so," he said.

The US added 517,000 jobs in January – more than doubling economist expectations – and GDP grew at a rate of 2.9% in the fourth quarter of 2022.

Goldman Sachs said Friday that it anticipates the Fed to hike interest rates three more times this year, after data released last week suggested persistent inflation pressures and continued resilience in the labor market.