Goldman Sachs provides insights into the expected monetary policy paths of the Federal Reserve (Fed) and the European Central Bank (ECB), forecasting the timelines for rate cuts and stabilization of policy rates.
Federal Reserve Policy Outlook:
- Hold on Rates: The Fed is expected to maintain the current federal funds rate range of 5.25-5.5% into 2024.
- First Rate Cut in 4Q24: Goldman Sachs anticipates the initial rate cut to occur in the fourth quarter of 2024, proceeding at a pace of 25 basis points per quarter.
- Higher Equilibrium Rate: The stabilization of the Fed funds rate is projected at a range of 3.5-3.75%, indicating a higher equilibrium rate compared to the previous cycle.
European Central Bank Policy Outlook:
- End of Hiking Cycle: The ECB's rate hiking cycle is believed to have concluded, with rates expected to remain on hold at 4.00%.
- First Rate Cut in 3Q24: The initial reduction in rates is forecasted for the third quarter of 2024, followed by a consistent cut pace of 25 basis points per quarter until the end of 2025.
- Policy Rate Projection: The ECB's policy rate is anticipated to reach 2.5% by the fourth quarter of 2025.
ECB Balance Sheet Policy:
- PEPP Reinvestment Limitation: Starting from the second quarter of 2024, the ECB is expected to limit Pandemic Emergency Purchase Programme (PEPP) reinvestments to EUR 10 billion per month.
- Halting Reinvestments: A complete stop in all reinvestments is projected from the third quarter of 2024.
Goldman Sachs' analysis suggests a cautious and gradual approach by both the Federal Reserve and the European Central Bank in unwinding their current tight monetary policies. While the Fed is expected to start easing rates in late 2024, the ECB is predicted to begin its rate cuts a bit earlier in mid-2024. Both central banks are projected to follow a measured pace in reducing rates, reflecting ongoing economic and inflationary considerations.