USD: No Fed rate decrease expected this year (Goldman Sachs)

In an analysis published today, Goldman Sachs warns that the growing idea that the Fed will soon reduce rates is misguided.

Fed President Jerome Powell said last week that the Fed will "do the right thing to support expansion", which the market has interpreted as a sign of falling rates in the near future.

Today, Goldman Sachs' chief economist stated: "Although this is very tight, we still expect the FOMC to keep the fund rate unchanged for the rest of the year".

"In our view, this is not an indication of a future rate reduction, but simply to ensure that the FOMC is well aware of the risks associated with the trade war".

The Chairman's speech focused exclusively on longer-term issues at a time when trade policy concerns were growing and might have seemed "disconnected" to some market participants.

Goldman Sachs doesn't believe this, but traders are increasingly relying on a relaxation of monetary policy to compensate for the potential damage caused by the trade war. According to CME's FedWatch tool, and as several banks point out, the federal funds futures market forecasts a nearly 70% probability of a rate cut in July and a 60% probability of three rate cuts this year.

"We expect Fed officials to be very careful not to deliver an unconditional message, but to continue to emphasise that they will react to problems if necessary to play their role," Hatzius said.