Goldman Sachs: A rate cut in December is "almost certain," with additional cuts in March and June next year.

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Although the release of the September employment report was delayed, this did not change Goldman Sachs' core views on the path of Fed monetary policy. Goldman’s base forecast indicates that after a rate cut in December, the FOMC may pause action in January 2026, followed by two additional rate cuts in March and June.

Chief economist Jan Hatzius noted in the latest report that a 25 basis point rate cut at the Fed's meeting on December 9-10 is a certainty, and the pace of easing will continue through 2026, eventually lowering the federal funds rate to a terminal level of 3%–3.25%.

This forecast is supported by the stance of key figures within the Fed. According to Goldman’s report, New York Fed President Williams made it clear last Friday that, as the cooling labor market increases downside risks to employment and upside risks to inflation have eased, "further adjustment" is needed in the near term.

Jan Hatzius believes this view aligns with Fed Chair Powell's stance—Powell almost certainly wrote in three rate cuts in the September dot plot—and also represents the consensus among most members of the Federal Open Market Committee (FOMC).

Right now, virtually nothing on the calendar could block the December 10 rate cut decision. Although the next jobs report is scheduled for release on December 16 and the CPI data on December 18, both come after the meeting. Based on this, the market focus has shifted from “whether to cut rates” to the policy path and economic landing shape after the cut.

As tariff drag decreases, tax cuts are implemented, and financial conditions ease, U.S. economic growth is expected to reaccelerate to the 2%–2.5% range in 2026, with the unemployment rate stabilizing slightly above September’s 4.44%.

Inflation Outlook and Rate Cut Path

Goldman believes that the upside risk for further Fed rate cuts is limited, mainly based on an optimistic reading of recent inflation data.

The report notes that while tariff pass-through effects have accounted for 0.5%–0.6% and financial services price increases have contributed 0.2%, the core PCE inflation rate has basically been flat this year, remaining around 2.8% in September.

This means that, excluding temporary factors, underlying inflation has already fallen close to 2%. As long as there is not a large secondary impact from tariffs and the stock market remains stable, the actual core PCE inflation rate is expected to further decline with tariff effects ending by mid-2026.

Against this backdrop, Goldman’s baseline scenario is to slow the pace of easing in the first half of 2026. While there may be a pause in rate cuts in January, additional cuts in March and June will ensure the rate returns to its neutral level.

Labor Market Concerns

Despite seemingly robust nonfarm payroll numbers, with an increase of 119,000 jobs, Goldman warns that downside risks in the labor market are building.

Estimates based on moving averages of establishment and household employment surveys show that the underlying employment growth trend is only 39,000. More critically, alternative indicators point to renewed layoffs in October. Although initial unemployment claims remain low, Goldman’s layoff tracking indicators—including Challenger layoff reports, WARN notices, and mentions of layoffs in Q3 earnings calls—have all risen significantly in recent months.

The report particularly highlights deteriorating employment for college-educated workers. As of September, the unemployment rate for college graduates aged 25 and over was 2.8%—not high in absolute terms, but up 1 percentage point (around 50%) from the 2022 low. The unemployment rate for college graduates aged 20–24 has risen even higher, to 8.5%. Given that college graduates account for over 40% of the American workforce—representing 55%-60% of labor income—deteriorating job prospects for this key group (perhaps reflecting the effects of AI and other efficiency measures) could have a disproportionately negative impact on consumer spending and prompt the Fed to further rate cuts in the future.

On the market’s concerns about an “AI bubble”, Jan Hatzius’s team analysis shows that incremental capital income generated by AI over the next 10–15 years (discounted baseline estimate of $8 trillion) still far exceeds currently projected cumulative AI capital expenditures.

From a fundamental perspective, spending is not excessive. The bad news, however, is that the stock market has already fully priced in these expected values. Given today’s extremely high valuations, Goldman equity strategists estimate that U.S. stock market returns over the next decade will be lower than the historical average, even though American markets are more dynamic and earnings grow faster.

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