Goldman Sachs: The Fed's interest rate cut this week is a foregone conclusion, but the easing threshold will be raised in the future
The Zhitong Finance App learned that Goldman Sachs said that the market generally expects the Federal Reserve to cut interest rates by 25 basis points for the third time in a row at the December FOMC meeting this week, lowering the federal funds rate target range to 3.5%-3.75%. However, interest rate cuts are expected to be accompanied by “hawkish” signals, indicating that the threshold for further policy relaxation in the future has been raised.
Goldman Sachs pointed out in a report that there are plenty of reasons for cutting interest rates this time. In terms of the job market, employment growth continues to fall short of the growth rate of labor supply. The unemployment rate has been rising to 4.4% for three consecutive months. Many indicators of job market tension have generally weakened. Some alternative data shows that the number of layoffs has recently begun to increase, posing new downside risks. In terms of inflation, the cumulative impact of tariffs on inflation is about 0.5 percentage points. Excluding the impact of tariffs, core personal consumption expenditure (PCE) inflation has fallen to about 2.3% this year, and is expected to fall further to 2% by the first half of 2026. Even including the impact of tariffs, core PCE inflation may fall to 2.2% by the end of 2026, and the risk of inflation will continue to subside.
However, Goldman Sachs added that although interest rate cuts are almost a foregone conclusion, this meeting may have some hawkish elements. First, the conference statement may follow the “extent and timing of additional adjustments” used a year ago, implying that the threshold for further interest rate cuts will be raised in the future; second, Federal Reserve Chairman Powell may emphasize the increase in the interest rate cut threshold at a press conference and once again explain the opinions of members opposed to interest rate cuts; in addition, it is expected that two members will vote against interest rate cuts, and five other members may express moderate objections through a bitmap, setting the appropriate interest rate level for 2025 at 3.875%. However, Goldman Sachs believes that these hawkish signals have been partially digested by the market and may not bring significant surprises.
In terms of economic forecasting, Goldman Sachs expects the Federal Reserve to raise the median GDP growth forecast for 2025 and 2026 to 2% (up 0.4 percentage points) and 2% (up 0.2 percentage points), respectively; at the same time, lower the core PCE inflation forecast, to 3% (down 0.1 percentage point) in 2025 and 2.5% in 2026, higher than Goldman Sachs's own forecast of 2.2%. In terms of the bitmap, it is expected that interest rates will be cut once to 3.375% in 2026 and another rate cut to 3.125% in 2027.
Looking ahead to 2026, Goldman Sachs points out that GDP growth is expected to pick up moderately as tariffs recede and fiscal stimulus strengthens, which may help stabilize the job market, but there are two major uncertainties: first, employment growth outside the healthcare industry has been negative for six consecutive months, and the starting point of the job market is weak; second, companies are increasingly inclined to use artificial intelligence to cut labor costs, which may inhibit recruitment and even increase layoffs.
If the job market stabilizes and inflation continues to fall back to around 2%, the Federal Reserve may shift from a risk management model to a policy normalization model. Goldman Sachs expects that members of the committee are divided on the appropriate terminal interest rate. Some believe that 3.5%-3.75% is appropriate, while others prefer to lower it to 2.5%-2.75%. In the end, they may choose to cut interest rates by 25 basis points two more times to reduce interest rates to 3% to 3.25%. From a probabilistic weighted perspective, Goldman Sachs's prediction of the Federal Reserve's policy path is still more dovish than market pricing.