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In the first year of Trump 2.0, the key difference between Goldman Sachs and the market: the Federal Reserve!
In the era of Trump 2.0, how will the Fed cut interest rates next year? Goldman Sachs and the market have different views.
On December 1st, the report released by Goldman Sachs showed that analyst Jan Hatzius and his team surveyed more than 500 market participants, and compared the expectations of Goldman Sachs with those of investors (markets) to better understand the policy expectations reflected in market pricing.
According to the report, Goldman Sachs and the market have a consensus on the impact of Trump policy on US immigration and fiscal policy, but there are differences on the path of the Fed's interest rate cut next year.
Goldman Sachs expects the Fed to cut interest rates continuously in the first quarter of 2025, and then gradually slow down, and cut interest rates for the last two times in June and September. Respondents' expectations are more hawkish.
Goldman Sachs does not agree with the market's hawkish expectations. On the one hand, Goldman Sachs believes that Trump policy is unlikely to cause huge inflation enough to prevent interest rate cuts; On the other hand, Goldman Sachs believes that the market underestimates the risk of a major impact on the financial market caused by a large policy change, which may trigger a reaction similar to the "insurance interest rate cut" in 2019.
Disagreement: Goldman Sachs believes that the market is too hawkish about the Fed's interest rate cut expectations.
Goldman Sachs and respondents have similar views on the fiscal policy that the new Trump administration may adopt, but they have different views on the prospects of monetary policy brought about by policy changes.
Goldman Sachs predicts that the Federal Open Market Committee (FOMC) of the Federal Reserve will cut interest rates continuously in the first quarter of 2025, and then gradually slow down, and cut interest rates for the last two times in June and September.
Respondents' expectations are more hawkish, and Goldman Sachs disagrees for two reasons:
First, Goldman Sachs believes that the policies of the new Trump administration are unlikely to cause huge inflation enough to prevent interest rate cuts.
Goldman Sachs believes that although the decrease in immigration may exert upward pressure on wages and prices in industries that employ a large number of immigrants, the impact on overall wages and prices is moderate, because immigrants increase demand and supply at the same time.
In addition, Goldman Sachs expects that the new government's fiscal stimulus will be moderate and have little impact on inflation. Moreover, in the baseline situation, tariffs will only have a moderate and one-off impact.
Second, Goldman Sachs believes that the market underestimates the risk of a major impact on the financial market caused by a large policy change, which may trigger a reaction similar to the "insurance interest rate cut" in 2019.
For example, the impact of a 10% general tariff on monetary policy may be two-way: inflation rises temporarily but economic growth slows down. In the last round of trade friction, the Federal Reserve finally gave priority to the growth risk and lowered the federal funds rate by 75 basis points.
Consensus: the net migration decreased slightly, the tax reduction policy continued, and the tax relief increased.
Goldman Sachs predicts that the new Trump administration will tighten the immigration policy-before the epidemic, the average net immigration in the United States was about 1 million per year, and Goldman Sachs predicts that by 2025, this number will drop to 750,000 per year, only slightly lower than before the epidemic, because administrative measures have certain legal and logistical restrictions.
According to a survey conducted by Goldman Sachs, about half of the respondents expect that the net migration will remain at the level of 500,000 to 1 million per year, which is consistent with Goldman Sachs' forecast. It is worth noting that, although there have been endless news reports about the possible mass expulsion of immigrants recently, only 6% of the respondents expect the net immigration to become negative.
In addition, Goldman Sachs expects that the 2017 tax reduction policy will be fully extended when it expires at the end of 2025, including the restoration of some expired corporate investment incentives. Goldman Sachs also expects that the new Trump administration's federal spending will increase and personal tax breaks accounting for about 0.2% of GDP will be increased.
Respondents also expect the tax reduction policy to continue, of which about two-thirds expect the tax reduction policy to be fully extended and one-third expect it to be partially extended.
For personal tax relief, about two-thirds of the respondents expect it to increase, but most investors expect that the amount of tax relief will be less than 100 billion US dollars, or less than 0.3% of GDP every year.
Respondents' expectations of the government efficiency department to cut spending are quite different. 42% of investors expect the reduction to be insignificant or extremely limited, 19% expect the reduction to be between 25 billion and 100 billion dollars, and 32% expect the reduction to exceed 100 billion dollars, equivalent to 0.3% of GDP every year.
Risk warning and exemption clause
The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.