Goldman Sachs expects the Federal Reserve to cut interest rates as early as December, one quarter later than previously forecast.

Due to rising energy costs caused by the Middle East conflicts and persistently higher-than-expected inflation, Goldman Sachs has postponed the timing of the next two Federal Reserve rate cuts by one quarter each, leading to renewed cooling of market expectations for monetary policy easing.

In a report on May 8, Goldman Sachs' U.S. economists pushed back their expectations for the next two Fed rate cuts to December 2026 and March 2027, one quarter later than previous forecasts. Goldman believes that the transmission effect of energy costs will keep core PCE inflation close to 3% throughout the year, far higher than the Fed’s 2% policy target, making conditions for rate cuts difficult to mature.

The Federal Reserve kept interest rates unchanged at the end of last month, but the meeting showed that uncertainty caused by the Middle East conflict disrupting the global energy market is intensifying disagreements within the Federal Open Market Committee (FOMC) over the policy outlook. Goldman’s latest forecast further strengthens market concerns about a delayed rate cut timetable.

Rate Cut Threshold Rises, Labor Market Must Weaken Simultaneously

Goldman economists pointed out that for the FOMC to start cutting rates this year, two conditions must be met simultaneously: first, monthly inflation data must show a notable decline after the oil price shock recedes; second, the labor market must weaken further. Both conditions are indispensable.

This means that simply relying on improved inflation data is not enough to trigger a rate cut; cooling of the labor market is equally a necessary precondition for Fed action, setting the threshold for a policy shift noticeably higher than the market previously expected.

Terminal Rate Forecast Unchanged; Most Officials Still Expect Room for Future Rate Cuts

Despite the delayed rate cut timing, Goldman maintains its 3% to 3.25% terminal rate forecast for the Fed, on the grounds that FOMC members’ views on the neutral rate remain generally stable. Goldman economists noted that most officials still expect at least a few more rate cuts eventually.

This assessment indicates that Goldman does not believe the current rate cut cycle has ended—only that it is progressing at a slower pace than previously anticipated.

Regarding the economic outlook, Goldman lowered the probability of the U.S. economy falling into recession in the next 12 months by 5 percentage points, to 25%. However, the bank also noted that this figure is still higher than the baseline estimate of 20% before the outbreak of the Iran war, indicating that risks from the Middle East situation to the downside of the U.S. economy have not completely dissipated.

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