Goldman Sachs: Referencing the 1990 oil crisis, the Federal Reserve will eventually cut interest rates

Golden Finance reports that on March 31, as the Middle East conflict sparked a surge in oil prices and stoked concerns about inflation, the global interest rate markets have recently seen a dramatic “hawkish repricing”—the market shifted from pricing in multiple Federal Reserve rate cuts earlier in the year to pricing in rate hikes by year-end. Goldman Sachs is challenging one of the most significant shifts in market pricing this year. The firm said investors are overestimating the likelihood that the Federal Reserve will raise rates in response to the current jump in oil prices. In a research note, Goldman Sachs strategist Dominic Wilson laid out the firm’s view: the market is overreacting to the oil shock, betting that the Federal Reserve will implement tighter policy, and based on historical experience, this is unlikely to happen. The historical reference from 1990 is central to Goldman’s assessment. Back then, when it faced an oil supply shock, bond market yields jumped sharply, and investors bet that the Federal Reserve would tighten policy. But in the end, the Federal Reserve went the other way and chose to cut rates as economic conditions deteriorated.
Goldman’s core logic is that inflation driven by rising oil prices is a supply-side shock, not demand-side overheating. Historically, the Federal Reserve typically ignores supply-side inflation pressure and does not tighten monetary policy because of it. When economic growth is already slowing, this tendency becomes even more pronounced. (Dongxin She)