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Goldman skeptical of 'insurance' U.S. rate cuts from Fed

Credit: REUTERS/Chris Wattie

Goldman Sachs economists said on Sunday they are skeptical of "insurance" U.S. interest rate decreases from the Federal Reserve to forestall possible slowing in U.S. economic growth due to global trade tensions.

June 16 (Reuters) - Goldman Sachs economists said on Sunday they are skeptical of "insurance" U.S. interest rate decreases from the Federal Reserve to forestall possible slowing in U.S. economic growth due to global trade tensions.

A surprise escalation in trade tensions between Washington and Beijing since May, together with stubbornly low inflation, have spurred bets among traders the U.S. central bank may lower key lending rates by 0.75 percentage points by year-end.

"However, we think the hurdle for such cuts is likely to be higher than widely believed," Goldman economists wrote in a research note published on Sunday.

A number of primary dealers, or the 24 top Wall Street firms that do business directly with the Fed, anticipate the Fed would lower key borrowing costs beginning this summer.

Goldman Sachs Group Inc GS.Nand a few other primary dealers have stuck with calls that the Fed would refrain from decreasing rates until there is evidence of significant deterioration in business and consumer activities.

Goldman economists said the three-quarter point in rate cuts in 1995-1996 and 1998, which some analysts point to as recent examples of pre-emptive policy easing from the Fed, were responses to data "rested at least as much on observable deterioration as on an insurance motive."

They said another assumption for insurance rate-cuts is that Fed officials could reserve the moves once the risk abates.

"However, the greater political scrutiny of Fed hikes now—especially with a presidential election approaching—could make this harder to do in 2020, so that overly hasty insurance cuts now might increase the risk that the funds rate gets stuck at too low a level if the economy remains resilient," they wrote.

On Friday, U.S. short-term interest rates futures implied traders see about a 58% chance the Fed would lower short-term rates by 0.75 point by year-end, up from 54% a week earlier and 7% a month ago, according to CME Group's FedWatch too.

Fed policy-makers will meet next Tuesday and Wednesday where analysts widely expect they would pave the way for possible rate cuts later this year.

Interest rates futures suggested traders priced in a 23% probability the Fed would lower rates next week, compared with 25% a week ago and 13% a month earlier, the CME FedWatch program showed.

(Reporting by Richard Leong; Editing by Lisa Shumaker)

((richard.leong@thomsonreuters.com; +1 646 223 6313; Reuters Messaging: richard.leong.thomsonreuters.com@thomsonreuters.net; Twitter @RichardLeong2))

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