NEW YORK (Reuters) - Goldman Sachs (GS.N) on Tuesday abandoned its forecast for any interest rate cuts this year, adding that it sees none in 2008 either, citing tightness in the labor market and expectations for stronger economic growth.
Previously, the bank’s economics research team expected three quarters of a percentage point of cuts in benchmark U.S. interest rates this year by the Federal Reserve’s rate-setting Federal Open Market Committee, beginning at the September FOMC meeting.
Goldman’s decision came a day after a similar forecast change by Merrill Lynch MER.N .
“Mmhhh, crow,” Jan Hatzius, chief U.S. economist at Goldman, said in a note to clients, referring to the adage of eating crow when one is proven wrong.
“Although the economy has slowed and inflation moderated in line with our forecasts over the past few quarters, we’ve been very surprised at the stability of the unemployment rate,” he added.
The bank’s economics research team said the absence of any tangible evidence of rising unemployment makes it unlikely that Fed officials will cut the funds rate target.
The Fed’s benchmark overnight target lending rate, the federal funds rate, stands at 5.25 percent.
Goldman’s team said they have boosted their estimates for real GDP growth on an annual basis in the second and third quarters of this year to 3 percent and 2.5 percent, respectively. Previous estimates were for 2 percent for both quarters. The group said it raised real growth estimates “on accumulating evidence of an impending rebound in manufacturing output.”
Goldman’s move comes a day after Merrill Lynch slashed its expectations for a rate cut this year, reducing its call for 2007 from 100 basis points of cuts to none. The firm cited its revised view on the Fed’s persistent hawkish inflation stance and a recent string of stronger-than-expected data.