Goldman Sachs: Despite Powell's hawkish stance, a December rate cut remains the baseline forecast.

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Fed Chair Powell’s statements after the October policy meeting caught the market off guard, but Goldman Sachs still maintains its baseline forecast for a rate cut in December. The firm believes the ongoing cooling of the labor market will push the Fed to cut rates by another 25 basis points before the end of the year.

Goldman Sachs expects that even if the US government shutdown ends next week, the incremental data the Fed receives before the December meeting is likelier to be weak, which will support a rate cut.

Powell delivered a hawkish signal after this week’s policy meeting, stating that monetary policy is not on a preset course and that committee members are divided on the pace of rate cuts. This surprised the market, as traders had mostly considered rate cuts in October and December a done deal before this.

The timing of this shift in tone is unexpected. According to current data, the Fed’s assessment of the economic outlook has not changed—the inflation rate excluding tariff factors is already close to the 2% target, and the labor market continues to weaken. Nevertheless, Powell’s cautious wording still brings uncertainty to the market.

Dot Plot Suggests Rate Cuts Remain Mainstream

Goldman macro traders Rikin Shah and Cosimo Codacci-Pisanelli point out that the September dot plot shows most members see rate cuts as the default option, and there are no signs of improvement in the labor market to warrant a change in that stance.

The Fed cut rates as expected in October, but Powell’s ambiguous attitude toward a December cut caused market volatility. However, fundamentally, the logic supporting a rate cut still holds—excluding tariff effects, inflation is close to the 2% policy target, and the ongoing cooling in the labor market shows no reversal.

Goldman believes that although Powell’s hawkish remarks are noteworthy, the dot plot reflecting the majority view of the committee still points toward a rate cut. In the absence of evidence of improvement in the labor market, this consensus should not fundamentally change.

Government Shutdown Will Weigh on Jobs Data

Even if the government shutdown ends next week, the incremental data the Fed sees before the December meeting is still likely to be on the weak side. Delayed resignation data from the Department of Government Efficiency (DOGE) will drag down the October jobs report, and the November data may also be affected.

The government shutdown will also reduce the reliability of the data as a signal, further increasing the complexity of Fed decision-making. With data quality compromised, the committee may be more inclined to rely on established trends when making judgments.

Goldman says that betting on a rate cut at the December meeting will ultimately prove to be a good long opportunity, but recommends waiting for a better entry point, as there is no immediate catalyst to trigger a market reversal.

The Policy Path in 2026 Is Full of Uncertainties

Looking beyond 2025, Goldman has repeatedly emphasized that the distribution of policy paths will become more dispersed, with many intertwining factors.

This week, Amazon announced that AI would lead to 14,000 layoffs at the company, which is a timely reminder to the market that, amid rising productivity, the labor market may weaken while economic growth remains solid, possibly implying a lower neutral interest rate.

Market pricing for the terminal rate has hovered around 3% for some time, but Goldman believes there’s a lot of uncertainty surrounding this level. Although Goldman is optimistic about economic growth rebounding next year, the corresponding rate trading strategy remains unclear.

Goldman concludes that Powell’s remarks have indeed made the market realize that different outcomes are possible at the December meeting. However, considering his repeated references to labor market weakness, as well as the likelihood of lackluster employment data for October and November, the firm expects a 25 basis point rate cut at the December meeting. In contrast, the Fed’s policy path for 2026 will be even more difficult to predict.

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