Goldman Sachs comments on the Fed decision: Rate cut likely in October

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Goldman Sachs believes that the Fed's rate cut in September is only the beginning of a new round of easing cycles.

According to ZF Trading Desk, after the Fed cut rates as expected in September, Goldman Sachs Economics Research Team released a report pointing out that this Fed meeting delivered five key signals, all indicating that the Fed has started a new cycle of rate cuts.

Based on Goldman's scenario analysis, in the baseline scenario (60% probability), it is expected that there will be further 25 basis point cuts in October and December. If the labor market deteriorates more than expected, there may even be a 50 basis point cut. In March and June next year, the Fed will cut rates quarterly, eventually bringing the rate down to 3.0-3.25%.

Signal One: The dot plot signals a more aggressive stance.

The Federal Open Market Committee (FOMC) dot plot shows that the committee supported three rate cuts this year by a narrow margin of 10 to 9, exceeding Goldman's previous expectation of two cuts.

Goldman believes that the Fed leadership is likely in the majority, reflecting that recent soft labor market data have strongly convinced a considerable number of decision-makers.

Signal Two: Policy statement wording shifts toward easing.

The FOMC post-meeting statement adopted dovish wording similar to that of September 2024 and Chair Powell's speech at Jackson Hole.

The description of the labor market in the statement—"Job growth has slowed, and although the unemployment rate has increased, it remains low"—is almost identical to the wording of the September 2024 meeting, after which the Fed launched three consecutive rate cuts.

Signal Three: Powell emphasizes concerns over the job market.

At the press conference, Powell said the job market "is indeed cooling down." Although labor supply has also fallen due to lower net immigration, the rise in unemployment suggests a more severe decline in labor demand. He emphasized:

We see the labor market softening; we don't need it to soften further, and we don't want it to soften further.

He specifically mentioned minority workers and young workers, groups more vulnerable to a weak job market, who are performing worse.

Signal Four: "Insurance rate cuts," one is far from enough

Powell characterized this rate cut as a "risk management" or "insurance" rate cut to address downside risks to the labor market.

Goldman Sachs believes that this rhetoric strongly echoes the tone during the three consecutive rate cuts by the Fed a year ago.

Historically, Powell's so-called "risk management cuts" or "insurance cuts" are rarely one-off events.

Goldman explains that such rate cuts aim to quickly address potential problems, rather than skipping a meeting and waiting three months to act. Therefore, they often come in “bundled series.”

Signal Five: Bond market pricing needs policy follow-through

Additionally, Powell skilfully responded to the question of whether a mere 25 basis point cut is enough to support the economy. He said bond market pricing of the entire rate cut path itself already provides substantial support to the economy.

Goldman believes this implies the Fed will have to deliver on this path.

Overall, Goldman’s probability-weighted path for the Fed rates is more dovish than current market pricing.

This means that, if Goldman's judgment is correct, the market may further price in more rate cuts in the future, thereby having a new impact on asset prices.

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