Goldman Sachs: The Federal Reserve should and will cut interest rates in December

Goldman Sachs' Fixed Income, Currency and Commodities (FICC) analysts believe that a rate cut by the Federal Reserve at the upcoming December meeting has essentially become a foregone conclusion.

The analysts pointed out that given the weak trends in the labor market and the need for risk management, a rate cut at this time is the correct policy choice, and market pricing has fully reflected this expectation.

Comments made by Williams last Friday were sufficient to indicate that there is enough support within the Federal Open Market Committee (FOMC) to push for a rate cut. As a result, market pricing has rebounded to 21 basis points. With the Federal Reserve officially entering its quiet period, the probability of a rate cut indicated by market pricing has risen to 85%.

Goldman Sachs analysts noted that given the sparse data calendar before this meeting and the high degree of consensus in market expectations, a rate cut has been "locked in." Considering the trajectory of the labor market, a rate cut in December, followed by a reassessment in January—after effectively observing three non-farm payroll reports—is a good risk management strategy.

Looking ahead, although there are downside risks to short-term labor data, the tailwinds from fiscal policy are expected to support economic growth next year. Goldman Sachs expects that with inflation remaining moderate and the potential for a dovish Federal Reserve chair, there is limited room for a sell-off in front-end rates, but shorting 10-year U.S. Treasuries will become a primary trading strategy in the first quarter of next year.

Goldman Sachs Analysis: Rate Cut is a Foregone Conclusion

Goldman Sachs FICC analysts Rikin Shah and Cosimo Codacci-Pisanelli pointed out in their report that the road to the December Federal Reserve meeting has been quite bumpy, but the final outcome is becoming clearer. Williams' remarks last Friday not only hinted at support for a rate cut within the committee but also directly prompted a correction in market pricing, bringing it back up to 21 basis points.

Currently, the Federal Reserve has officially entered its pre-meeting quiet period, and the probability of a rate cut reflected in market pricing has exceeded 80%. Coupled with the light macro data release schedule before the meeting, there are no significant data disturbances that could alter this path. Goldman Sachs believes that the rate cut decision in December has been "locked in."

Signs of Weakness in the Labor Market

Although last week's non-farm payroll report (NFP) showed strong job growth, beneath the surface data, the underlying trends in the labor market remain weak. Analysts emphasized that both the unemployment rate and the number of continuing unemployment claims have risen, indicating a loosening job market.

Additionally, various layoff tracking indicators are sending concerning signals. The number of layoffs mentioned in Challenger data, WARN notices, and third-quarter earnings call discussions has increased in recent months.

Goldman Sachs Global Investment Research (GIR) data specifically points to a significant deterioration in the employment situation of college-educated workers—currently, the unemployment rate for this group in the 20 to 24 age range has reached 8.5%.

This is crucial because college graduates account for 55% to 60% of labor income in the United States. Given this downward trajectory in the labor market, Goldman Sachs believes that it is a reasonable risk management measure for the Federal Reserve to take preemptive interest rate cuts.

Fiscal Tailwinds and Growth Outlook

Regarding the policy path for next year, Goldman Sachs believes the situation is more complex, requiring a trade-off between labor market softening and the upcoming fiscal tailwinds. Analysts have repeatedly pointed out that the growth outlook will be supported by various factors, the most significant of which is the fiscal tailwind brought by the "Inflation Reduction Act."

This act is expected to create high turnover currency, which will quickly flow back into the economy. Based on this, Goldman Sachs maintains its growth forecast in the range of 2% to 2.5%. This cyclical boost should be sufficient to help stabilize the labor market, but the key lies in timing. The risk of labor market data at the beginning of next year leans towards the downside, especially against the backdrop of a low breakeven point for new job creation.

Inflation Environment and Trading Strategy

On the inflation front, Goldman Sachs expects price trends to remain benign. Currently, the potential inflation rate, excluding tariff factors, is close to 2%. Additionally, Hasset, currently a popular candidate for Federal Reserve Chair, is seen as a dovish signal, combined with the complex impacts of artificial intelligence (which may lower inflation and employment), suggesting that the sell-off space dominated by the front end of the yield curve seems relatively limited.

Analysts expect that terminal rate pricing will continue to hover around 3%. For investors, trading for a better growth outlook in 2026 by shorting the 10-year part of the yield curve would be a reasonable choice. However, considering the potential weakness in labor data at the beginning of next year and the relative anchoring of front-end rates, Goldman Sachs recommends timing this short trade entry in the first quarter