Goldman Sachs raises Fed rate cut forecast to three in 2025

Goldman Sachs has revised its 2025 Federal Reserve rate cut forecast to three 25 basis point reductions, totaling 75 basis points, citing muted tariff impacts and increasing labor market weakness. The firm now expects cuts in September, October, and December, aligning with projections from Citigroup and Wells Fargo. This revision also lowers Goldman's projected terminal rate to 3.00%-3.25% from 3.50%-3.75%, implying further easing from the current 4.25%-4.50% range.

Analysis

Goldman Sachs has materially increased its forecast for Federal Reserve easing, now projecting three 25 basis point rate cuts in 2025, a significant shift from its previous expectation of a single cut. The firm attributes this revised outlook to several factors: disinflationary forces proving stronger than anticipated, the inflationary impact from tariffs being more muted than previously feared, and signs of emerging labor market weakness. This dovish pivot aligns Goldman's view with that of Citigroup and Wells Fargo, both of which also forecast 75 basis points of cuts starting in September, creating a stronger consensus among major Wall Street firms. UBS holds an even more aggressive view, projecting 100 basis points of reduction. The rationale is further supported by recent economic data, such as the unexpected decline in U.S. consumer spending for May. Looking further out, Goldman has lowered its terminal rate forecast to a range of 3.00%-3.25% from 3.50%-3.75%, suggesting a more protracted easing cycle with two additional cuts expected in 2026. The upcoming June jobs report is now a critical data point that could either validate or challenge this increasingly dovish monetary policy outlook.

Key Decisions for Investors

• The growing consensus for multiple rate cuts starting in September suggests a more accommodative monetary policy environment, which is typically supportive for both equities and fixed-income assets; consider positioning for a lower-rate regime.
• Monitor the upcoming June jobs report closely, as a weaker-than-expected figure would likely reinforce the case for a September rate cut and could act as a significant positive catalyst for rate-sensitive sectors.
• Given the lowered terminal rate forecast to 3.00%-3.25%, investors might consider extending duration in bond portfolios to lock in current yields before they potentially decline further over the 2025-2026 period.
• While the tariff impact is currently seen as muted, any re-escalation of trade tensions or a surprise uptick in inflation data remains a key risk that could disrupt the dovish narrative and market positioning.