Goldman Sachs urges the Fed to cut rates immediately—here's why

The investment bank believes the Fed has made a major miscalculation in its assessment of the labor market
By Sam Bourgi
•
25 July 2024
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The U.S. job market is slowing much faster than expected—a cue that it's about time to lower interest rates, say Goldman Sachs analysts.

In a note to clients, the analysts cited three signs of labor market weakness: Household employment growth has slowed, hiring rates have fallen below their pre-pandemic average, and national unemployment is on the rise.

Altogether, the U.S. labor market is slowing faster than in 1995, 1998, and 2019—years when the Fed cut interest rates outside of recession, according to Goldman Sachs.

“We find that the decision to cut has been most sensitive to the unemployment rate and jobless claims historically,” the note said, as first reported by Business Insider.

It’s not the first time that Goldman analysts have pointed to a weakening labor market as a way to advocate for rate cuts.

In a recent note to clients, Goldman’s chief economist, Jan Hatzius, said unemployment and inflation trends implied a federal funds rate below 4%, which is much lower than the current rate of 5.5%.

The (growing) case for rate cuts

Many prominent economists echo Goldman strategists' warnings. They argue that the Fed’s obsession with inflation has made it lose sight of its other core mandate: promoting full employment.

Queens’ College president Mohamed El-Erian and Moody’s Mark Zandi, believe the Fed should have already lowered interest rates by now.

In El-Erian’s view, the economy is slowing faster than the Fed expects, magnifying the risk of a recession that drives unemployment sharply higher. He’s called on the Fed to abandon its strict inflation target and shift its focus to the economy.

Meanwhile, Zandi warned in early May that the job market was quickly running out of steam. Employers are “creating lots of jobs, but it’s showing wear and tear: slumping hiring, fewer openings, quits and hours. Layoffs are low, but that’s next on businesses’ to-do list,” he said.

“Risks are rising. The Fed keeps rates too high for too long and breaks something,” Zandi explained.

Evidence of a cooling labor market hasn’t been lost on Fed Chair Jerome Powell, who told Congress earlier this month that policymakers were keeping a close eye on unemployment.

During his two-day testimony, Powell strongly signaled that the central bank was eyeing rate cuts but didn’t specify a timeframe. According to Wall Street speculators, there’s a 96% chance that the Fed will lower rates for the first time in September.

Like El-Erian and Zandi, Wall Street Journal editor Aaron Back thinks the Fed shouldn’t wait that long. In his view, the central bank’s upcoming meeting on July 30-31 is an appropriate time to begin the rate-cut process.

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