Goldman Sachs: Rate cuts in December are "imminent," with one cut each in March and June next year

Despite the delay in the release of the September employment report, this has not changed Goldman Sachs' core judgment on the Federal Reserve's monetary policy path. Goldman Sachs' baseline forecast indicates that after a rate cut in December, the FOMC may pause in January 2026, followed by two more rate cuts in March and June.

Chief Economist Jan Hatzius pointed out in the latest report that a 25 basis point rate cut by the Federal Reserve at the December 9-10 meeting is a foregone conclusion, and future easing measures will continue into 2026, ultimately pushing the federal funds rate down to a terminal level of 3%-3.25%.

This forecast is supported by the positions of key figures within the Federal Reserve. According to Goldman Sachs' report, New York Fed President Williams clearly stated last Friday that due to the cooling labor market leading to increased downside risks to employment and a weakening of inflationary pressures, further adjustments are needed in the near term.

Jan Hatzius believes that this view is not only consistent with Federal Reserve Chairman Powell's stance—Powell almost certainly indicated three rate cuts in the September dot plot—but also represents the consensus among the majority of the Federal Open Market Committee (FOMC) voting members.

Currently, there are almost no factors in the calendar that could hinder the rate cut decision on December 10. Although the next employment report is scheduled for release on December 16 and the CPI data on December 18, both will come after the meeting. Based on this, market focus has shifted from "whether to cut rates" to the policy path and economic landing shape after the rate cuts.

With the reduction of tariff drag, the implementation of tax cuts, and the easing of financial conditions, U.S. economic growth is expected to accelerate back to a range of 2%-2.5% in 2026, with the unemployment rate stabilizing slightly above the September level of 4.44%.

Inflation Outlook and Rate Cut Path

Goldman Sachs believes that the upside risks for further rate cuts by the Federal Reserve are limited, mainly based on an optimistic interpretation of recent inflation data.

The report notes that although tariff transmission has brought a 0.5%-0.6% impact and contributed 0.2% to rising financial services prices, the core PCE inflation rate has remained flat this year, holding at around 2.8% in September.

This means that, excluding transitory factors, the underlying inflation rate has dropped to near 2%. As long as there are no large-scale secondary effects from tariffs and the stock market remains stable, the actual core PCE inflation rate will further decline as the tariff transmission effects end in mid-2026.

In this context, Goldman Sachs' baseline scenario is to slow the pace of easing in the first half of 2026. While a pause in rate cuts may occur in January, additional cuts in March and June will ensure that rates return to neutral levels.

Concerns in the Labor Market

Despite the seemingly strong non-farm payroll data, which increased by 119,000, Goldman Sachs warns that downside risks in the labor market are accumulating.

Estimates based on moving averages of employment surveys and household surveys indicate that the potential employment growth trend is only 39,000. More critically, alternative indicators show signs of renewed layoffs in October. Although initial claims for unemployment benefits remain low, Goldman Sachs' layoff tracking indicators—including the Challenger layoff report, WARN notices, and layoff information mentioned in third-quarter earnings calls—have significantly increased in recent months The report particularly emphasizes the worsening employment situation faced by college-educated workers. As of September, the unemployment rate for college graduates aged 25 and older was 2.8%. Although this absolute value is not high, it has increased by 1 percentage point (approximately 50%) from the low point in 2022. The unemployment rate for college graduates aged 20 to 24 has risen even more, reaching 8.5%. Given that college graduates account for over 40% of the U.S. labor force and 55%-60% of labor income, the deterioration of employment opportunities for this key group (which may reflect the impact of AI and other efficiency-enhancing measures) could have a disproportionately negative effect on consumer spending, potentially prompting the Federal Reserve to implement more rate cuts in the future.

In response to market concerns about the "AI bubble," the analysis from Jan Hatzius's team shows that the incremental capital income generated by AI over the next 10-15 years (with a discounted value baseline estimate of $8 trillion) is still far higher than the currently projected cumulative AI capital expenditures.

From a fundamental perspective, spending is not excessive. However, the bad news is that the stock market has already fully priced in these expected values at current levels. Due to the currently extremely high valuation levels, Goldman Sachs stock strategists expect that, despite the U.S. market being more vibrant and experiencing faster earnings growth, the return on U.S. stocks over the next decade will be below the historical average for the U.S