Despite a hawkish dot plot, Goldman still anticipates two Fed rate cuts this year

The markets were taken aback by the June dot plot's more aggressive posture, which projected a single rate decrease in 2024 as opposed to the two that the consensus had anticipated.

Nonetheless, Fed Chair Jerome Powell hinted that both outcomes were still conceivable when he stated at his press conference on Wednesday that many participants thought the choice was close.

The market-implied chance of a rate decrease by September rose from 59% to a peak of 85% after the SPI data, which was milder than predicted. However, following the FOMC meeting, the probability declined to 65%.

In a note, Goldman analysts stated, "We continue to expect a first rate cut in September and a second cut in December."

Economists pointed out that, despite the FOMC meeting's baseline of one rate cut, there were subtly discernible signs of "sympathy for cutting" in reaction to inflation progress.

They emphasised that the word "a lack of" progress towards the 2% objective was replaced with "modest" improvement in the FOMC's statement. During his opening remarks, Chair Powell underlined the cumulative progress made by noting that inflation has decreased from a peak of 7% to 2.7%.

Powell covered several other significant points in his address. Given the FOMC's higher unemployment and NAIRU forecasts, he pointed out that labour market data would have to be worse than anticipated to support a rate reduction.

Furthermore, the head of the central bank minimised the significance of neutral rate forecasts in policy choices, which increased to 2.75% today. Powell concluded by stating that the Fed's communications plan will be the main topic of the upcoming framework review, which will begin late this year.

(Sources: investing.com)