On March 31, Goldman Sachs expects core PCE to rise to 3.5% this year, and the Federal Reserve cut interest rates three times in the second half of the year. This is due to tariffs that lead to inflation and economic downturn. The Federal Reserve needs to balance and the direction remains to be seen.
On March 31, according to the Federal Reserve's Mickey Bulletin Nick Timiraos, Goldman Sachs expects the growth rate of core personal consumption expenditure (PCE) to rise to 3.5% this year, higher than the previous expectation of 3.0%. Meanwhile, Goldman Sachs expects the Fed to cut interest rates three times in the second half of this year to cope with the impact of economic growth and employment. This forecast has attracted widespread attention from the market. So, from the increase in Goldman Sachs' expectations for core PCE, how can we view the direction of the Fed's interest rate cut in the second half of the year?
Goldman Sachs raised its core PCE expectations mainly due to the impact of rising import costs on inflation. Goldman Sachs significantly raised its expectations for US tariffs in 2025 in its research report, and the average US tariff rate is expected to rise by 15 percentage points in 2025. As the Trump administration continues to advance tariff policies and measures such as imposing new tariffs on steel, aluminum and automobiles have increased the cost of imported goods, which in turn has driven up domestic prices. For example, during the implementation of similar tariff policies in the past, the cost of raw materials in related industries increased, resulting in an increase in the price of terminal products, thus having an upward pull on core PCE.
However, with the rising pressure on core PCE, Goldman Sachs expects the Fed to cut interest rates three times in the second half of the year. This is because economic growth and employment are facing the impact of tariff policies. Goldman Sachs lowered its 2025 fourth-quarter GDP growth forecast by half a percentage point to 1%, and raised its unemployment rate forecast by 0.3 percentage points to 4.5% at the end of 2025. The economic downside risks brought by tariffs increase the possibility of a "insurance" interest rate cut portfolio similar to the 2019 "insurance" rate cut. Although the Fed's leadership has so far downplayed the impact of rising inflation expectations, in fact, rising inflation expectations have indeed raised the threshold for interest rate cuts. The Fed will pay more attention to the basis for potential increase in unemployment to determine whether to cut interest rates.
From the Fed's own perspective, at the March FOMC meeting, it revised up the 2025 median PCE and core PCE inflation forecasts by 0.2 and 0.3 percentage points to 2.7% and 2.8%, respectively, which is still significantly higher than the 2% policy target. Boston Federal Reserve Chairman Susan Collins said Trump's tariffs will push up U.S. inflation, and it is not clear how long this upward pressure will last, so the Fed should keep interest rates stable for a longer period of time. But if the downward pressure on the economy significantly exceeds expectations, the Federal Reserve may accelerate the pace of interest rate cuts in order to stimulate economic growth and stabilize the job market.
Overall, Goldman Sachs expects core PCE to rise to 3.5%, which seems contradictory to the Fed's three interest rate cuts in the second half of the year, but actually reflects the complex situation facing the US economy. On the one hand, tariffs have driven up inflation, while on the other hand, economic growth and employment have been dragged down. When formulating monetary policies, the Federal Reserve needs to balance difficult between controlling inflation and maintaining economic growth and employment. The Federal Reserve's decision to cut interest rates in the second half of the year will closely focus on many factors such as changes in economic data, inflation trends, and the continued impact of tariff policies. The direction is still full of uncertainty and deserves continued attention from the market.
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