Goldman Sachs thinks interest rates will stay even higher than the Fed expects

Published Thu, Nov 9 20236:59 AM EST

Federal Reserve policymakers will have to hold interest rates higher than they think over the long term, according to Goldman Sachs. Even after the central bank starts cutting, which markets expect to happen in 2024, Goldman economists expect the Fed to have to hold its policy rate higher than it previously had indicated. In numerical terms, that means a long-run neutral federal funds rate in a target range between 3.5%-3.75%, half a percentage point higher than its last forecast and a full point above the unofficial forecast from policymakers at their September meeting . The current funds rate is targeted between 5.25%-5.5%. The so-called neutral rate is one that neither boosts nor restricts growth and is primarily a theoretical concept. In their September outlook , Federal Open Market Committee members put the level at 2.5%, consistent with previous indications. However, Goldman said a variety of factors are lining up to make both the Fed's target and those of other global central banks unrealistic. The investment bank also boosted its policy rate forecasts by half a percentage point for the European Central Bank as well as the Bank of England and the Australian and Canadian central banks. "The most important driver of this forecast change is our longstanding view that the neutral rate is a poorly identified concept, and that changes in financial conditions are more useful in determining the appropriate stance of policy," Goldman said in a client note. Factors pushing policy rates up include high government deficits , investment in AI and carbon emission reductions and productivity increases from generative AI. Moreover, the ability of developed economies to keep growing in the face of higher rates also could diminish the need for cuts. "As labor markets rebalance, growth is around potential, and inflation normalizes back to target, many central banks will see the argument for further easing as relatively weak, especially when coming from above," the firm said. "And if economies do prove resilient with policy rates at elevated levels, some central banks could reevaluate their estimates of longer-run rates and conclude that, in retrospect, the downgrades during the post-2008 cycle were excessive." Fed officials recently have espoused a "higher for longer" policy. While somewhat divided over the need for additional hikes, they also see cuts unlikely at least in the near future. The September projections indicated one more quarter-point hike this year and two cuts at some point in 2024.