Goldman Sachs anticipates the Fed to implement three rate reductions, considering increased recession risks ahead

    by VT Markets
    /
    Mar 31, 2025

    Goldman Sachs has adjusted its forecast to anticipate three Federal Reserve rate cuts for this year, up from a previous expectation of two. This revision aligns with their outlook of an increased likelihood of a recession linked to forthcoming tariffs from Trump on 2 April.

    The new prediction indicates that the Fed is expected to lower rates in July, September, and November, contrasting with their earlier forecast which suggested cuts in June and December.

    Implications Of The Revised Rate Path

    This forecast shift from Goldman Sachs implies an increased sense of urgency around monetary easing, tied to the growing possibility of economic contraction. The adjustment in timing—from a mid-year start and a year-end follow-up to cuts spaced more evenly across the second half—suggests a revised view on when pressure points will begin affecting broader economic indicators.

    The reasoning, according to Hatzius, hinges on the anticipated imposition of new trade measures in early April. These, we believe, are likely to generate dampening effects not just on global sentiment but directly on U.S. business investment and consumer confidence. If these tariffs take hold, imports may become more expensive and margins thinner, especially for firms reliant on intermediate goods sourced from the affected regions.

    By moving the earliest anticipated rate cut from June to July, it appears there is now an expectation that the effects of trade headwinds will show up with greater clarity in late Q2 data. A September move, following closely after, supports the notion that the economic response could be sharper than initially assumed, with disinflationary forces potentially requiring a sustained policy response through the autumn.

    From our perspective, the decision to insert a third cut in November tells us that expectations for recovery within the year are lower. The Federal Reserve seems now more likely to take a pre-emptive rather than reactive stance on softening demand. Bond markets will be the first to price this in, followed by more complex derivative instruments.

    Positioning For Summer And Autumn Policy Moves

    We are watching as implied rate volatilities begin to compress. That can lead to more narrow intraday movements and potentially provide entry points for those weighing calendar spreads aligned with the new projected path. One-month and three-month rate options may offer relatively inexpensive exposure if set up in anticipation of a dovish tone in summer FOMC statements.

    Powell and his colleagues appear to be signalling greater willingness to counteract downside risk early. We do not see this simply as a neutral hedge against uncertainty but rather a calibrated response to newly probable fiscal shocks. That trajectory also opens the door for realignment of forward guidance in speeches and minutes prior to each cut.

    Traders should prepare for moved-up pricing in eurodollar and SOFR contracts, especially across the July–November window. Term structure steepening could follow if longer-dated expectations remain anchored. Over-hedging near-term exposure might prove expensive if timing drifts, so we are considering risk in shorter durations first, as they may absorb the shift more quickly.

    The underlying message is that monetary policy may become more responsive within a compressed time horizon. Strategies favouring front-end sensitivity with modest delta remain the most tactically suited in a period when rate cuts are not just projected, but possibly needed to support faltering domestic momentum.

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