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

Goldman Sachs now forecasts the U.S. Federal Reserve will implement three 25-basis-point interest rate cuts this year and two more in 2026, projecting a terminal rate of 3-3.25%, driven by moderating inflation data, including a marginal 0.2% rise in July CPI. Market futures reflect a 93% probability of a 25bps easing next month, with a notable 7% chance of a 50bps cut, partly influenced by Treasury Secretary Scott Bessent's public advocacy for larger cuts citing recent soft employment figures. Traders are currently pricing in approximately 65 basis points of easing for the year.

Analysis

Market expectations for a dovish Federal Reserve pivot have solidified, anchored by a new Goldman Sachs forecast projecting three 25-basis-point rate cuts in the current year and a terminal rate between 3.00% and 3.25%. This outlook is directly supported by recent macroeconomic data, specifically the moderation in the July Consumer Price Index, which rose a marginal 0.2% driven by a 2.2% decline in gasoline prices. Rate futures markets are reflecting high conviction in this scenario, pricing a 93% probability of a 25 bps cut in September and a total of 65 basis points of easing for the year. Notably, a more aggressive policy response is gaining traction as a non-trivial possibility, with the odds of a 50-basis-point cut rising to 7% following public commentary from U.S. Treasury Secretary Scott Bessent, who cited recent soft employment data as justification for a more substantial easing of what he termed "too constrictive" monetary policy.

Key Decisions for Investors

• Given that markets are pricing in approximately 65 basis points of easing this year, consider increasing duration in fixed-income portfolios to capitalize on potential bond price appreciation as yields decline.
• The dovish outlook is favorable for equities, but investors must watch upcoming inflation and employment data closely as these reports will be the primary determinants of the Fed's actual policy path versus current expectations.
• While the base case is a 25 bps cut, the rising probability of a 50 bps move, influenced by political commentary, introduces a potential for increased market volatility that warrants monitoring.