• Goldman Sachs economists warn high inflation and elevated survey-based expectations reduce the likelihood of near-term rate cuts.
  • Markets remain divided on 2025 easing, with futures pricing in two to three reductions as economic indicators weaken.
  • Fed officials seek reassurance from stable market-based inflation measures before committing to policy shifts.

Stubborn Inflation Delays Fed Easing

Persistent price pressures are forcing Wall Street to recalibrate expectations for Federal Reserve rate cuts, with Goldman Sachs now projecting just two reductions in 2025 - likely in June and December. The investment bank's economists note that while deteriorating economic data could still prompt action, current inflation trends present "a sufficiently high bar" for monetary easing.

Market-implied probabilities reflect the uncertainty, with CME Group data showing traders split between two or three quarter-point cuts this year. This comes as the Fed maintains its federal funds rate at 4.25%-4.5%, extending a pause that began in January.

The Data Dilemma

Core PCE inflation - the Fed's preferred gauge - is now expected to finish 2025 at 2.8%, above previous estimates. While survey-based measures remain politically polarized, Goldman analysts argue they "can't be ignored" in policymakers' calculus. The firm suggests officials would find comfort if market-based inflation compensation signals the current uptick won't persist beyond 2025.

"What institutional investors are really focused on is regulatory stability," said one fixed-income strategist familiar with the discussions, drawing parallels to private market concerns. "The Fed's messaging has become increasingly data-dependent as political and economic crosscurrents intensify."

Balance Sheet Adjustments

Amid the rate debate, the central bank plans to slow its quantitative tightening program beginning in April, reducing monthly Treasury rolloffs from $25 billion to $5 billion. This technical adjustment aims to prevent liquidity strains while maintaining downward pressure on the balance sheet.

Goldman maintains its terminal rate forecast of 3.5%-3.75% for 2026, but cautions that Trump administration policy shifts on tariffs and taxes could further complicate the inflation outlook. With GDP growth projections trimmed to 1.7% and unemployment expected to rise to 4.4%, the Fed's dual mandate faces increasing tension between price stability and employment goals.