Goldman Sachs brings forward the expectation for the Federal Reserve to cut interest rates: possibly in September, with a terminal rate of 3%-3.25%

Goldman Sachs economists in the United States stated in a recent report that the Federal Reserve may cut interest rates in September, three months earlier than previously predicted by Goldman Sachs. David Mericle, Goldman Sachs' Chief U.S. Economist, indicated that the likelihood of a rate cut in September is slightly above 50%.

The reason for Goldman Sachs adjusting its rate cut forecast is that preliminary signs show the impact of tariff policies this year is slightly lower than expected, while other inflation-relief factors are stronger than anticipated. Additionally, senior officials at the Federal Reserve may also agree with Goldman Sachs economists that the impact of tariffs on price levels will be a one-time effect.

Moreover, there are signs of weakening in the labor market. David Mericle wrote in the report, "While the labor market overall still appears healthy, it has become more difficult to find a job." Seasonal residual effects in the data and changes in immigration policies also pose downward risks to employment data in the short term.

In terms of outlook, Goldman Sachs expects the Federal Reserve will not cut rates at the July FOMC meeting, predicting rate cuts of 25 basis points in September, October, and December of 2025, and an additional 25 basis points in March and June of 2026. Mericle stated that if one of the motivations for a rate cut is preventive measures, then taking action in consecutive meetings is the most natural choice.

Mericle also pointed out that they originally expected the long-term dot plot of the Federal Reserve FOMC, which reflects officials' long-term forecasts for the federal funds rate, would shift slightly upward. They had anticipated that the Federal Reserve would consider a terminal rate moderately above the long-term neutral level reasonable in the context of an unusually large fiscal deficit, high market risk sentiment, and a resulting loose financial environment.

However, the subsequent situation is that the dot plot from the FOMC in June did not make any adjustments, and with Federal Reserve Chairman Powell's term ending next year, the new chairman may not support maintaining high rates under conditions of high deficits and high-risk sentiment.

Mericle stated that some Federal Reserve officials have hinted that if future inflation data does not come in too high, they may support a rate cut at the September meeting.

Previously, inflation expectations released by institutions such as the University of Michigan had risen, but now they seem no longer to pose an obstacle to an early rate cut: relevant indicators have slightly retreated, and an increasing number of people believe that partisan bias and other technical factors have affected the accuracy of these data.

Additionally, some offsetting inflation-relief factors are emerging: wage growth is slowing, the impact of catch-up inflation is dissipating, and weak travel demand is providing additional deflationary pressure.

Meanwhile, job vacancies in the labor market have also begun to slowly decline again. Mericle wrote, "Although Federal Reserve officials have been setting a higher threshold for rate cuts than in 2019, if future employment reports are concerning, then an early rate cut may again become the path of least resistance."

Goldman Sachs has also lowered its terminal rate expectation from the previous range of 3.5% to 3.75% to a range of 3% to 3.25%. However, this does not mean they have changed their views on the long-term neutral rate for the U.S. economy or the economic conditions for the coming year. Mericle wrote:

Our previous research indicates that moderate changes in the federal funds rate have a limited impact on the economy, thus the definition of the real neutral interest rate itself is somewhat ambiguous.

Whether the terminal rate is 3%-3.25% or 3.5%-3.75%, the U.S. economy may ultimately stabilize at a state that can reasonably be described as achieving maximum employment and 2% inflation. This ambiguity means that decision-makers' subjective views on the neutral interest rate remain significantly important