Goldman Sachs: One more rate cut and then the Fed is done

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Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., on Wednesday, July 31, 2019.

Andrew Harrer | Bloomberg | Getty Images

After one more interest rate cut the Federal Reserve will be finished cutting rates, according to Goldman Sachs.

The firm estimates an 80% probability of another rate cut this year to wrap up the Fed’s easing cycle.

“[Powell’s] language we see as consistent with our expectation that easing will end with a second 25bp cut,” said Goldman Sachs chief economist Jan Hatzius in a note to clients following Wednesday’s FOMC meeting.

On Wednesday, the Federal Reserve appeased the markets by cutting the target range for its overnight lending rate 25 basis points, to 2% to 2.25%. This marked the first rate cut since the start of the financial recession more than a decade ago. The major indices sold-off and bond yields rose after Fed Chairman Jerome Powell’s press conference, where he watered down the chances of more rate cuts in the future.

Powell’s comments were received as hawkish given that markets priced in a much deeper cutting cycle, said Hatzius. Although Powell did not rule out further rate cuts, his comments that the Fed was making a “midcycle adjustment ” and was not in a longer-term rate cutting mode panicked investors.

Hatzius said he sees a 55% chance of 25 basis point cut in September, a 5% chance of a 50 basis point cut, and a 40% chance of no cut.

While Hatzius expects a second cut at the September central bank meeting, he continues “to see little need for it.”

“Uncertainty is not actually particularly high and capex expectations are not particularly depressed,” said Hatzius.

U.S. stock index futures rose on Thursday, with the Dow Jones Industrial Average futures pointing to a gain of more than 60 points at the open. Futures on the S&P 500 and Nasdaq 100 also indicated a positive open.

— with reporting from CNBC’s Michael Bloom

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