Goldman Sachs noted that the Federal Reserve may be more open to further interest rate cuts next year than the market previously anticipated. Goldman Sachs believes that employment reports in the coming months, particularly unemployment rate data, will be key in determining the direction of policy.
Goldman Sachs expects that, following last week’s rate cut and notably cautious remarks by Chairman Jerome Powell regarding labor market risks, the Federal Reserve may be more open to further rate cuts next year than previously assumed by the market.
Josh Schiffrin, Chief Strategy Officer of Goldman Sachs’ Global Banking and Markets Division and head of financial risk, stated that Powell’s comments at last week’s press conference indicate growing concerns within the Fed about the sustainability of the employment situation. While the Fed’s baseline scenario remains to keep rates steady and evaluate incoming data, Schiffrin believes the barriers to further rate cuts may be lower than feared before last week’s meeting.
Powell acknowledged the ongoing gradual cooling of the labor market but also warned that recent employment data may overstate underlying job growth. He emphasized what he described as significant downside risks to labor conditions, suggesting that the Fed is becoming increasingly sensitive to signs of economic deterioration rather than concerned about overheating.
According to Goldman Sachs’ analysis, this shift in focus makes upcoming labor market data crucial for shaping policy expectations. Schiffrin noted that the next few employment reports will be key determinants of whether the Fed maintains an accommodative stance, with particular attention to the unemployment rate rather than overallnonfarm payrollsincreases.
Looking further ahead, Goldman Sachs anticipates that this rate-cutting cycle will extend into 2026, with the federal funds target rate potentially falling to 3% or lower. This outlook reflects the view that inflation will continue to moderate while labor market weakness will intensify, giving the Fed room to unwind remaining policy restrictions.
In terms of interest rate markets, Schiffrin expects the yield curve to steepen as short-term yields decline with policy easing, while long-term yields are supported by supply dynamics and term premium considerations.
For the US dollar, the combination of declining interest rates and a steepening yield curve suggests a potential softening in its medium-term trajectory, especially if employment data confirms the Fed’s growing concerns.