Goldman Sachs sees Fed cutting rates thrice in 2025, twice more in 2026

Goldman Sachs projects the Federal Reserve will enact three 25-basis-point interest rate cuts in 2025 and two additional cuts in 2026, lowering the terminal rate to 3%-3.25% from the current 4.25%-4.50%. This forecast follows moderating July CPI data, which increased marginally by 0.2%. Market rate futures currently price in a 93% chance of a 25-bps easing next month, while Treasury Secretary Scott Bessent has publicly advocated for more aggressive 50-bps cuts, citing recent weak employment figures.

Analysis

Goldman Sachs forecasts a significant monetary easing cycle, projecting three 25-basis-point interest rate cuts in 2025 and two more in 2026, which would lower the terminal federal funds rate to a range of 3.00% to 3.25%. This outlook is underpinned by moderating inflation, as evidenced by the July Consumer Price Index which rose by only 0.2%, driven by a 2.2% drop in gasoline prices. Market sentiment is strongly aligned with this dovish stance, with rate futures indicating a 93% probability of a 25-bps cut next month and pricing in approximately 65 basis points of total easing this year. However, a notable tension exists between this market consensus and political pressure from U.S. Treasury Secretary Scott Bessent, who is publicly advocating for a more aggressive 50-basis-point cut. Bessent justifies this by citing recent weak employment data, arguing that current rates are overly constrictive, which introduces a variable that could influence the Federal Reserve's pace and magnitude of future policy adjustments.

Key Decisions for Investors

• Consider positioning for a lower interest rate environment, as the consensus forecast favors assets like growth stocks and long-duration fixed income, which typically benefit from monetary easing.
• Monitor upcoming employment data with heightened scrutiny, as the divergence between Goldman's inflation-based forecast and the Treasury Secretary's employment-driven call for aggressive cuts identifies labor market health as a key determinant for the Fed's policy path.
• Given that the market has almost fully priced in a 25-basis-point cut for next month, investors should be cautious of a potential hawkish surprise and acknowledge the asymmetric risk profile of short-term interest rate wagers.