NAR’s Yun: Favorable Inflation Report Gets Fed Closer to Rate Cut; Goldman Sachs Predicts Next Cut in December

WASHINGTON—The favorable inflation report released yesterday by the U.S. Bureau of Labor Statistics has some analysts predicting the Federal Reserve may resume cutting rates in the not-too-distant future.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% on a seasonally adjusted basis in April, after falling 0.1% in March, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all-items index increased 2.3% before seasonal adjustment.

The index for shelter rose 0.3% in April, accounting for more than half of the all-items monthly increase. The energy index also increased over the month, rising 0.7% as increases in the natural gas index and the electricity index more than offset a decline in the gasoline index. The index for food, in contrast, fell 0.1% in April as the food at home index decreased 0.4% and the food away from home index rose 0.4% over the month.

The index for all items less food and energy rose 0.2% in April, following a 0.1-percent increase in March. Indexes that increased over the month include household furnishings and operations, medical care, motor vehicle insurance, education, and personal care. The indexes for airline fares, used cars and trucks, communication, and apparel were among the major indexes that decreased in April.

The all-items index rose 2.3% for the 12 months ending April, after rising 2.4% over the 12 months ending March. The April change was the smallest 12-month increase in the all-items index since February 2021. The all-items less food and energy index rose 2.8% over the last 12 months. The energy index decreased 3.7% for the 12 months ending April. The food index increased 2.8% over the last year.

NAR Chief Economist Lawrence Yun issued a positive statement in response to the inflation report, although noting that the inflation rate is still not at the Federal Reserve’s 2% target. He said he expects four to six rate cuts will be approved by the Fed going forward. Goldman Sachs, however, has a much more conservative forecast, only expecting a total of three rate cuts in the next two years.

“We are one step closer to a rate cut by the Federal Reserve as consumer price inflation continues to calm down. The latest inflation rate of 2.3% is the slowest rise in about four years, but still above the target inflation rate of 2%,” Yun said. “Prescription medicine prices rose by 2.3% even as non-prescription drug costs fell by 1%. These costs could dramatically change in the upcoming months, though they comprise just 1.3% of the overall consumer budget and inflation calculation. Medical service costs like visits to the doctor and hospitals take up a larger proportion, and these costs rose by 3.1%. The jumbo heavyweight of inflation is housing costs.”

Yun continued, “Comprising one-third of the budget, that cost rose by a hefty 4%. Getting shelter costs under control with more housing supply (and not via disastrous rent control) will be the key to getting overall inflation fully tamed and for the Federal Reserve to ‘normalize,’ which in my view means four to six additional rate cuts. Fed rate cuts with high inflation will not result in lower mortgage rates. However, rate cuts because of falling inflation will mean meaningfully lower mortgage rates.”

Reuters reported that brokerages have scaled back their odds of a recession this year based on the latest inflation report and the short-term tariff deal reached between the U.S. and China.

Goldman Sachs reduced its U.S. recession forecast to 35% from 45%, marking the first major brokerage to do so, while Barclays dismissed recession risks entirely and J.P. Morgan placed the recession probability below 50%.

According to the Reuters report, Goldman Sachs now expects a total of three rate cuts from the Federal Reserve in 2025 and 2026. It sees one reduction in December instead of July and the remaining in March and June next year. The brokerage had earlier predicted three rate cuts for 2025.

“The rationale for rate cuts shifts from insurance to normalization as growth remains somewhat firmer, the unemployment rate rises by somewhat less, and the urgency for policy support is reduced,” Goldman stated.

Barclays and J.P. Morgan agree with Goldman Sachs in forecasting just one Federal Reserve rate cut in December 2025. Previously, Barclays had projected two rate cuts in July and September, while J.P. Morgan anticipated a single reduction in September. Citigroup pushed its expectations for the next Fed rate cut to July from June.