• The Federal Reserve will cut interest rates just 3 times in 2024, according to Goldman Sachs.

• The bank lowered its forecast for 4 interest rate cuts after elevated inflation data.

• "Our inflation path for the rest of the year is now in a range where small surprises could have large consequences," Goldman Sachs said.

Higher-than-expected inflation readings over the past two months have led Goldman Sachs to revise its 2024 interest rate forecasts.

The bank now expects the Federal Reserve to deliver just three 25-basis point interest rate cuts this year, down from its prior projection of four rate cuts.

Three interest rate cuts in 2024 is about half of what the market originally expected at the beginning of the year.

"Inflation has been firmer in recent months, but we think it is still on track to fall enough by the June FOMC meeting for a first cut," Goldman Sachs economist David Mericle said in a note on Sunday. "This has become less obvious though, and our inflation path for the rest of the year is now in a range where small surprises could have large consequences."

Mericle said he expects that the Fed is targeting its first rate cut in June and that the upcoming FOMC meeting later this week should reveal a dot plot that suggests the Fed is also leaning towards three interest rate cuts this year.

But elevated inflation remains the biggest risk to the forecast, according to Mericle.

"The main risk is that FOMC participants might instead be more concerned about the recent inflation data and less convinced that inflation will resume its earlier soft trend. In that case, they might bump up their 2024 core PCE inflation forecast to 2.5% and show a 2-cut median," Mericle said.

The recent inflation data has shown a slight uptick relative to prior months data. While some chalk the increase to seasonality, concerns are growing that inflation might stay elevated above the Fed's long-term 2% target.

"We estimate that core PCE rose 0.45% in January (incorporating likely revisions) and 0.29% in February after averaging 0.16% in the back half of 2023," Mericle explained.

Mericle still expects inflation to continue its downward trend later this year, with year-over-year core PCE inflation hitting 2.4% by the Fed's June FOMC meeting. That should be low enough for the Fed's first interest rate cut, Mericle said.

Aside from interest rates, investors will start to focus on the Fed's balance sheet runoff plans, according to the note.

"We expect the Committee to slow the pace of Treasury runoff from $60 billion to $30 billion per month after its May meeting and to then continue runoff through 2025 Q1, at which point the size of the balance sheet should be about $6.7 tn or 23% of GDP," Mericle said.

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