The Fed Is Forecast to Cut Rates in December as Employment Cools

Goldman Sachs Research maintains its forecast for a Federal Reserve interest rate cut in December, despite Chair Jerome Powell's recent hawkish tone and potential FOMC opposition to 'risk management cuts.' Chief US economist David Mericle points to implied September FOMC projections, historical precedent for proactive cuts, and genuine weakness in the labor market as key drivers. The firm also anticipates two additional 25-basis-point cuts in March and June 2026, targeting a terminal rate of 3-3.25%, supported by Powell's acknowledgment of a 'modestly restrictive' policy and the desire to avoid further labor market cooling.

Analysis

Goldman Sachs Research (GSR) maintains its forecast for a Federal Reserve interest rate cut in December, despite Chair Jerome Powell's recent hawkish press conference. Chief US Economist David Mericle highlights that implied September FOMC projections and historical "risk management cuts" support this view. The Fed also announced it would cease running off its $6.6 trillion balance sheet in December, reinvesting mortgage-backed securities principal into Treasury bills, signaling a shift in quantitative tightening.

GSR's conviction stems from genuine weakness in the US job market, which is unlikely to show convincing improvement by December, and Powell's acknowledgment of a "modestly restrictive" monetary policy. Powell noted that inflation, net of tariff effects, is near the 2% target, and the labor market is gradually cooling. The potential lack of official economic data due to a government shutdown, while a concern for some FOMC members, is not seen by GSR as derailing the December cut.

Beyond December, GSR anticipates two additional 25-basis-point cuts in March and June 2026, targeting a terminal rate of 3-3.25%. However, Mericle suspects substantial opposition within the FOMC to these proactive risk management cuts, a sentiment Powell may have voiced during his press conference. This internal dissent could introduce volatility or uncertainty into future policy decisions.

Key Decisions for Investors

• Investors should assess portfolio positioning for a potential December rate cut, considering assets that typically benefit from lower interest rates.
• Monitor upcoming labor market and inflation data closely, as these will be key determinants for the Fed's future policy path, especially given current data uncertainties.
• Evaluate the implications of the Fed's balance sheet adjustment, specifically the reinvestment of MBS principal into Treasury bills, for market liquidity and Treasury yields.
• Consider the potential for FOMC dissent against future "risk management cuts" in 2026, which could introduce volatility around the projected terminal rate.