The Fed may start cutting interest rates earlier than expected, according to Goldman Sachs. Economists at the agency predict that the rate cut could begin in September as inflation pressures ease and the impact of tariffs weakens.
This forecast means the previous December expectation has been brought forward by three months.
The Goldman Sachs Research Team also revised its final level estimate for the FED’s policy rate. The terminal rate expectation, which was previously in the range of 3.50-3.75%, was lowered to the range of 3.00-3.25%. This revision is driven by the expectation that the impact of tariff policies on prices will be more limited than expected and the stronger impact of other disinflationary factors.
Goldman Sachs Chief U.S. Economist David Mericle said the probability of a September rate cut was “a little over 50%.” Mericle and his team expect rate cuts of 25 basis points in September, October and December 2025, as well as in March and June 2025. However, a July cut is not expected.
The report also noted some signs of a slowdown in the labor market. Although the labor market appears healthy, it is noted that finding a job has become more difficult. In addition, seasonal effects and changes in immigration policy pose downside risks to employment data in the near term.
On the inflation front, positive signals stand out. According to Goldman Sachs, the impact of customs duties imposed on China on consumer prices was lower than expected. In addition, inflation expectations in the Michigan and Conference Board surveys declined. The slowdown in wage increases and the weakness in travel demand were among the additional disinflationary factors.
Goldman Sachs said the revision to the terminal interest rate was not due to a change in the economy’s long-term natural interest rate. Mericle said, “The lack of clarity about the true neutral interest rate could cause the terminal rate to remain flexible depending on policymakers’ perceptions.”
The fact that there was no significant change in the FOMC dot plot chart in June and that Fed Chair Jerome Powell’s term will end in 2026 indicates that new approaches to monetary policy may be adopted in the future.
*This is not investment advice.