Goldman Sachs Delays Fed Rate Cut Expectations to December and March Next Year

Goldman Sachs' US economists, in a report on May 8th, have pushed back their expectations for the next two Federal Reserve rate cuts to December 2026 and March 2027, respectively, each delayed by one quarter from their previous forecast.

The driving factor is the inflation transmission following the rise in energy costs due to conflicts in the Middle East. Goldman Sachs believes that core PCE inflation will continue to hover close to 3% for the rest of the year, significantly higher than the Federal Reserve's 2% policy target, making conditions for rate cuts difficult to mature.

The economists at Goldman Sachs pointed out that if the FOMC is to initiate rate cuts within this year, two conditions must be met simultaneously: a noticeable decline in monthly inflation following the dissipation of oil price shocks, and further weakening in the labor market; neither can be absent.

This implies that relying solely on an improvement in inflation data is not enough to trigger a policy shift; a cooling in employment is also a necessary precondition, with the actual action threshold being significantly higher than what the market previously anticipated.

Despite the postponed timing, Goldman Sachs maintains its forecast for the Federal Reserve's terminal rate of 3% to 3.25%, and notes that most FOMC officials still expect at least a few more rate cuts in the end, indicating that this cycle of rate cuts has not ended, but rather the pace has been slowed.

In terms of economic outlook, Goldman Sachs has reduced the probability of the U.S. economy falling into a recession within the next 12 months by 5 percentage points to 25%, but the firm also points out that this number is still higher than the pre-Iran war baseline estimate of 20%, with the Middle East situation's downward risk to the U.S. economy not yet fully dissipated.

The Federal Reserve maintained its interest rates unchanged at the end of last month, with meeting minutes showing that uncertainties from the Middle East conflict disrupting the global energy market are intensifying divisions within the FOMC. Goldman Sachs' latest forecast corroborates this background, further reinforcing market expectations for a continued postponement of the easing timeline.