Wall Street giant Goldman Sachs has revised its forecast on when the U.S. Federal Reserve will make the first rate cut this year. This delay in their forecast for the first Fed rate cut this year comes as the Iran war threatens to drive inflation higher, which could make the U.S. Central Bank more wary of easing monetary policy.
Goldman Sachs Shifts Fed Rate Cut Forecast
According to a Reuters report, Goldman Sachs has delayed its forecast for a rate cut from June to September. The Wall Street giant now expects the first cut to happen in September and that the Fed will make another 25 basis points (bps) cut in December.
The bank cited rising inflation risks linked to the Iran war as the reason for delaying the Fed rate cut forecast. As CoinGape reported, the IEA has cut its 2026 global oil supply forecast by 50% amid tensions in the Middle East, with this supply shock potentially driving inflation higher.
Goldman Sachs stated that by September, they expect both further labor market softening and progress on underlying inflation to contribute to the case for a cut. The bank added that there was the possibility of earlier cuts if the labor market weakens sooner and more substantially than expected.
It is worth noting that the February U.S. jobs report signaled that the labor market remains weak despite earlier signs of a rebound in January. Fed Governor Chris Waller suggested that they should make another Fed rate cut at the FOMC meeting next week, given that the labor market remains weak. Waller also expects the inflation shock caused by the Iran war is likely to be short-lived.
Goldman Sachs noted that if the labor market weakens enough to warrant earlier cuts, the Fed may prioritize it even in the face of rising inflation due to higher oil prices. The inflation risk, however, remains prominent even as Iran has declared that the Strait of Hormuz will remain closed.
Crypto Traders Now Pricing Only One Cut
Polymarket data shows that crypto traders now expect only one Fed rate cut this year. There is currently a 28% chance that the Fed will make only one cut this year and a 27% chance of two cuts. Furthermore, the odds of zero cuts are rising, sitting at 20%.
Furthermore, the odds of three Fed rate cuts this year have dropped to 13%. It is worth noting that prior to the Iran war, market participants were pricing in three cuts starting from June, when the new Fed chair will take office.
However, with the odds of the Iran war lasting till May rising to 70%, the market is now bracing for a prolonged conflict. Notably, U.S. President Donald Trump has already signaled to continue the war as long as possible despite rising oil prices.
There also remains the possibility that the Fed will hike rates. According to the January FOMC minutes, several participants signaled that they will support a rate hike if inflation continues to trend above their 2% target.