Goldman Sachs: The Federal Reserve should, and will, cut interest rates in December.

Goldman Sachs Fixed Income, Currencies, and Commodities (FICC) analysts believe that an interest rate cut at the upcoming December Federal Reserve meeting is essentially a foregone conclusion.

Analysts point out that, based on the weakening trend in the labor market and the need for risk management, cutting rates at this time is the correct policy choice, and market pricing has already fully reflected this expectation.

Comments made last Friday by Williams are sufficient to indicate that there is already enough support within the Federal Open Market Committee (FOMC) to push through a rate cut. As a result, market pricing has rebounded to 21 basis points. As the Fed officially enters its blackout period, the probability of a rate cut indicated by market pricing has risen to as high as 85%.

Goldman Sachs analysts note that, given the sparse data calendar before this meeting and the strong market consensus, the rate cut is "locked in." Considering the trajectory of the labor market, the Fed cutting rates in December followed by a reassessment in January—after observing three additional non-farm payroll reports—is a sound risk management strategy.

Looking ahead, although there are short-term downside risks to labor data, fiscal policy tailwinds are expected to support economic growth next year. Goldman Sachs expects that, with inflation remaining moderate and the possibility of a dovish Fed Chair, there is limited room for front-end rate sell-off, but in the first quarter of next year, shorting the 10-year U.S. Treasury will be the main trading strategy.

Goldman Sachs Analysis: A Rate Cut Is a Done Deal

Goldman Sachs FICC analysts Rikin Shah and Cosimo Codacci-Pisanelli point out in the report that the road to the December Fed meeting has been rather bumpy, but the final outcome is becoming clear. Williams’ remarks last Friday not only hinted at internal committee support for rate cuts but also directly led to a correction in market pricing, pushing it back up to 21 basis points.

Currently, the Fed has officially entered the meeting blackout period, and the probability of a rate cut reflected in market pricing has exceeded 80%. Combined with a light macro data release schedule before the meeting, there are no major data disruptions that can alter this path. Goldman Sachs believes the December rate cut decision is already "locked in."

Signs of Weakness in the Labor Market

Although last week's non-farm payroll report (NFP) showed robust employment growth, underlying trends in the labor market remain weak beneath the surface. Analysts emphasize that both the unemployment rate and continued jobless claims have increased, indicating a loosening job market.

In addition, various layoff tracking indicators are sending concerning signals. Challenger data, WARN notices, and the number of layoffs mentioned in third-quarter earnings calls have all increased in recent months.

Goldman Sachs Global Investment Research (GIR) data specifically highlight a significant deterioration in employment conditions for college-educated workers—in the 20 to 24 age group, the unemployment rate for this group has now reached 8.5%.

This is crucial, as college graduates account for 55% to 60% of U.S. labor income. In light of the deteriorating trajectory of the labor market, Goldman Sachs believes the Fed’s pre-emptive rate cut is a prudent risk management measure.

Fiscal Tailwinds and Growth Prospects

Regarding next year's policy path, Goldman Sachs believes the situation is more complex, requiring a balance between a softening labor market and upcoming growth tailwinds. Analysts have repeatedly pointed out that the growth outlook will be supported by multiple factors, the most significant being the fiscal tailwind generated by the implementation of the "Big and Beautiful Act."

This act is expected to create high-turnover currency, quickly flowing funds back into the economy. On this basis, Goldman Sachs maintains its growth forecast in the 2% to 2.5% range. This cyclical boost should be enough to help stabilize the labor market, but the key lies in timing. At the beginning of next year, labor market data risks are tilted to the downside, particularly given the low break-even employment rate for new jobs.

Inflation Environment and Trading Strategy

On inflation, Goldman Sachs expects price trends to remain benign. Currently, the underlying inflation rate after excluding tariffs is close to 2%. Additionally, Hasset is currently the frontrunner for Fed Chair and is viewed as a dovish signal, combined with the complex impacts of artificial intelligence (possibly lowering both inflation and employment), which means the room for front-end yield curve sell-off appears to be limited.

Analysts expect the terminal rate pricing to continue hovering around 3%. For investors, trading for better growth prospects in 2026 by shorting the 10-year portion of the yield curve is a reasonable choice. However, considering that labor data may be weak at the beginning of next year and short-term rates are relatively anchored, Goldman Sachs recommends entering the short trade in the first quarter.

Risk Notice and DisclaimerThe market is risky, and investment must be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their specific circumstances. Investments based on this are at your own risk.