Will the Federal Reserve cut interest rates early in September? Goldman Sachs urgently revises report: Moderate inflation + cooling employment become key drivers!

According to the Zhitong Finance APP, economists at Goldman Sachs' research department stated that the Federal Reserve may lower policy interest rates in September, three months earlier than their previous forecast.

Goldman Sachs adjusted its rate cut predictions because early evidence suggests that the impact of tariff policies this year is slightly less than expected, while other forces suppressing inflation are stronger. Goldman Sachs economists believe that tariffs will only have a one-time impact on price levels.

Additionally, there are signs that the job market may be softening. David Mericle, Chief U.S. Economist at Goldman Sachs' research department, stated in a report: "Although the labor market still appears healthy, finding a job has become difficult." Seasonal factors remaining in the data and changes in immigration policy also pose downside risks to recent employment data.

When will the Federal Reserve cut interest rates?

Mericle estimates that the likelihood of a rate cut in September is "slightly above" 50%. The Mericle team expects the Federal Reserve to cut rates by 25 basis points in September, October, and December, and to make similar cuts in March and June of 2026. "If there is any insurance motivation for a rate cut, then cutting rates in consecutive meetings is the most natural thing to do," Mericle said regarding rate cuts in 2025. "We do not expect a rate cut in July."

Goldman Sachs' research department predicts a terminal rate of 3-3.25%, down from a previous forecast of 3.5-3.75%.

Goldman Sachs expects the Federal Reserve to start cutting rates in September.

Mericle stated that his team had previously expected the long-term dot plot of the Federal Open Market Committee (FOMC) to rise slightly. They also expect the Federal Reserve to conclude that a terminal fund rate slightly above the long-term neutral rate is appropriate given the unusually large fiscal deficit and strong risk sentiment keeping financial conditions loose. However, the FOMC dot plot remained unchanged in June, and the new Federal Reserve Chair (Jerome Powell's term will end next year) may not agree that the large deficit and strong risk sentiment should keep the fund rate at a slightly elevated level.

What are the prospects for U.S. inflation and employment?

Mericle wrote that some Federal Reserve officials hinted that if the upcoming inflation data is not too high, they may support a rate cut at the September meeting. Meanwhile, survey evidence and other data show that the transmission effect of tariffs on consumer prices is slightly lower than Goldman Sachs' previous expectations.

The earlier surge in inflation expectations indicators from Michigan and the Conference Board no longer seems to pose a significant obstacle to an early rate cut: both indicators have retreated, and it seems that more people believe that partisan bias and other technical factors have distorted these indicators.

There are also signs that anti-inflation factors are at play. Wage growth is slowing, catch-up inflation is ending, and weak travel demand is bringing additional anti-inflationary pressure At the same time, the number of job vacancies in the labor market has begun to slowly decline. Mericle stated, "Although Federal Reserve officials are trying to set a higher threshold for interest rate cuts than in 2019, any panic in the upcoming employment report could make an early rate cut the path of least resistance again."

What is the outlook for the Federal Reserve's terminal interest rate?

Goldman Sachs Research has lowered its terminal rate forecast to 3-3.25%, but this does not reflect a change in people's views on the true long-term neutral rate of the U.S. economy or the economic situation a year from now. Mericle stated, "On the contrary, our previous research indicates that slight changes in the fund rate have limited impact on the economy, which makes the true neutral rate somewhat ambiguous."

Mericle noted that whether the final rate is 3-3.25% or 3.5-3.75%, the economy could stabilize at a level that can be described as full employment and 2% inflation. He stated, "This ambiguity leaves some room for policymakers' perceptions of the neutral rate."