Goldman Sachs Drops Forecast for Fed Rate Cuts This Year

Tuesday, 5 Jun 2007 | 2:39 PM ET

Goldman Sachs abandoned its forecast for three quarters of a percentage point of cuts in benchmark U.S. interest rates this year because of tightness in the labor market and expectations for stronger economic growth, adding it expects no Fed rate cuts in 2008 either.

"Previously, we expected 75 basis points of rate cuts, beginning at the September FOMC meeting," the bank's economics research team wrote in a note to clients, referring to the Federal Reserve's rate-setting Federal Open Market Committee.

"However, although real (gross domestic product) growth has slowed as anticipated, the absence of any tangible evidence of rising unemployment makes it unlikely that Fed officials will cut the funds rate target."

The Fed's benchmark overnight target lending rate, the federal funds rate, stands at 5.25%.

Goldman's team said they have boosted their estimates for real GDP growth on an annual basis in the second and third quarters of this year to 3% and 2.5%, respectively. Previous estimates were for 2% for both quarters.

The move comes a day after Merrill Lynch slashed its expectations for a rate cut this year, reducing its call for 2007 from 100 basis points of cuts to none. The firm cited its revised view on the Fed's persistent hawkish inflation stance and a recent string of stronger-than-expected data.

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