According to Deep Tide TechFlow news on January 2, Goldman Sachs reported a reduction in its forecast for the Federal Reserve's interest rate cuts this year from 100 basis points to 75 basis points, stating that reports of a rebound in core inflation have been greatly exaggerated. The annualized core PCE inflation from September to November last year was 2.5%, slightly above the 2.3% from the previous three months, but below the 2.8% year-on-year increase, still consistent with a continuing decline.
The report also indicated that the Dallas Fed's adjusted average PCE inflation from September to November last year was 2.4%, with November's figure at 1.8%. As the tightness in the labor market returns to 2017 levels, the annual wage growth rate has slowed to 3.9%, within the range of 3.5% to 4%. If productivity growth is 1.5% to 2% in the coming years, it will align with 2% inflation. Goldman Sachs also assumes that the average tariff rate on U.S. imports from China will increase by 20%, and tariffs will be imposed on European automobiles and Mexican electric vehicles, which is expected to raise inflation by 0.3% to 0.4% next year.
However, the related effects should dissipate after one year, unless significant second-round effects arise from wages or inflation expectations. This would make it comparable to the VAT increases that have occurred multiple times in other G10 economies, which typically do not leave a lasting impact on inflation or monetary policy. Furthermore, the trade war from 2018 to 2019 tightened financial conditions enough to prompt the Federal Reserve to ease policy, suggesting that the monetary policy risks from tariffs are at least two-sided.