Goldman Sachs, Citigroup: If non-farm data worsens again, the Federal Reserve may aggressively cut rates by 50 basis points in September, with a terminal rate of 3% or lower
The latest employment data from the United States shows that the U.S. economy and labor market are sharply slowing down, which has convinced Wall Street that the Federal Reserve's policy turning point is imminent. Goldman Sachs and Citigroup have predicted that a rate cut of 25 basis points or even 50 basis points could start as early as September, with the final policy rate potentially dropping to 3% or even lower. At the same time, dovish forces within the Federal Reserve are gathering, possibly clearing the way for earlier and faster rate cuts
The U.S. economy is showing clear signs of slowing down, especially in the critical labor market, making it seem imminent that the Federal Reserve will initiate a rate-cutting cycle.
The latest employment data has become the catalyst for market expectations. According to reports from the trading desk, Goldman Sachs estimated on August 4 that the potential monthly job growth in the U.S. has plummeted from 206,000 in the first quarter to just 28,000 in July. Citigroup pointed out in its report that after significant downward revisions to the employment data, Federal Reserve officials may "no longer have the patience to wait for rate cuts" and have lost the "luxury" of adopting a "wait-and-see" attitude.
Based on this, both Goldman Sachs and Citigroup believe there is a very high likelihood of a 25 basis point rate cut in September, and if the data worsens further, a more aggressive cut of 50 basis points could be possible. Goldman Sachs predicts that the Federal Reserve will implement three consecutive 25 basis point rate cuts in September, October, and December 2025. Citigroup, in its baseline scenario, forecasts that the policy rate will drop to 3% and believes the risks lean towards even lower interest rate levels.
This shift in expectations is also driven by political factors. The resignation of Federal Reserve Governor Adriana Kugler, along with the first simultaneous dissenting votes from two governors at the last meeting since 1993, suggests that dovish forces within the Fed may be strengthening, paving the way for faster easing policies.
Job Cooling and Economic Stalling
Recent data paints a picture of a rapidly weakening U.S. labor market. Goldman Sachs emphasized that the July employment data reinforced its view that U.S. economic growth is nearing a standstill. The potential job growth trend has "plummeted," far below the breakeven point of about 90,000 needed to maintain market stability.
The negative revisions to the May and June wage data in the U.S. employment report further confirm market weakness. Goldman Sachs analyzed that during economic downturns, companies that delay reporting data are often those laying off employees, leading to an overestimation of initial data. Citigroup similarly believes that considering the structural overestimation in wage statistics in recent years, the revised job growth may not even be positive.
An earlier article from Wall Street Insight reported that the U.S. added only 73,000 non-farm jobs in July, far below expectations, with the data for the previous two months revised down by 258,000. The U.S. labor market is no longer just experiencing a "moderate slowdown," but rather an "abrupt halt," which could trigger new recession concerns.
The weakness in the labor market is occurring alongside a broader economic slowdown. According to Goldman Sachs, in the first half of 2025, the annualized growth rate of U.S. real GDP is only 1.2%, a full percentage point below its estimated potential growth rate. The firm expects the economy to maintain the same weak growth pace in the second half of the year. Goldman Sachs noted that despite some easing in financial conditions, due to weak job growth and the effects of tariffs on consumer prices not yet fully realized, real disposable income and consumer spending are expected to grow very slowly Citigroup also expressed a similar view, believing that potential economic activity growth has slowed below potential in the first half of this year, providing justification for lowering policy interest rates to neutral or lower levels.
Federal Reserve's "Dovish Shift"
In addition to economic data, political dynamics in Washington have added new variables to interest rate cut expectations. The resignation of Federal Reserve Governor Adriana Kugler provides President Trump with an opportunity to appoint a new governor and nominate a successor to the Fed Chair before the September policy meeting. Predictive markets indicate that the main candidates for Fed Chair include former Fed Governor Kevin Warsh, Director of the National Economic Council Kevin Hassett, current Governor Christopher Waller, and Treasury Secretary Janet Yellen.
Notably, at the recent Federal Open Market Committee (FOMC) meeting, both Governor Waller and Vice Chair for Supervision Randal Quarles voted in favor of an interest rate cut. According to Goldman Sachs, the last time two governors simultaneously voted against an interest rate cut at an FOMC meeting dates back to 1993.
Goldman Sachs believes that this "dual dissent" event indicates that the internal support for easing policies within the Federal Reserve is gathering strength. The appointment of Trump's new governors may further alter the balance of power within the FOMC, clearing the way for earlier and faster interest rate cuts.
Interest Rate Peak May Be Below 3%
As economic data signals red lights, Wall Street has provided more aggressive predictions for the Federal Reserve's interest rate cut path. Goldman Sachs' baseline scenario is that the Fed will cut rates by 25 basis points consecutively in September, October, and December of 2025, and make two more 25 basis point cuts in the first half of 2026, ultimately bringing the federal funds rate to a range of 3.0-3.25%. 
Figure: Market pricing indicates more than two rate cuts within the year, source: Citigroup
Citigroup's forecast is even bolder, with its baseline scenario predicting the policy rate to drop to 3%, noting that "the risks are skewed towards lower rates." Both institutions believe that if future economic data deteriorates further, such as a rise in the unemployment rate, a significant 50 basis point cut by the Fed in September is not out of the question.
Figure: Market pricing suggests the federal funds rate will be slightly above 3% by the end of 2026, source: Citigroup
Policy Divergence May Intensify Downward Pressure on the Dollar
The Federal Reserve's policy shift stands in stark contrast to other major central banks, which may become a key catalyst driving the dollar weaker. Goldman Sachs expects that even if the Fed lowers rates to 3%-3.25% by mid-2026, the European Central Bank (ECB) may still maintain the deposit rate at 2%, as economic indicators in the Eurozone remain robust This policy divergence will weaken the interest rate advantage of the US dollar. Goldman Sachs explicitly pointed out its bearish stance on the dollar in the report. The analysis states that, from the perspective of the broad real trade-weighted exchange rate, the dollar is still 15% higher than its long-term average; at the same time, the US current account deficit accounts for as much as 4% of GDP. These fundamental factors, combined with the continuously narrowing interest rate spreads, are unfavorable for the dollar.
In addition, concerns about US economic governance and data quality may also put pressure on the dollar. The Goldman Sachs report mentions that after President Trump announced the decision to fire the director of the US Bureau of Labor Statistics (BLS), the dollar experienced a slight but significant depreciation, indicating that the foreign exchange market is closely monitoring the associated risks. Based on this, Goldman Sachs recommends that investors establish long positions at the front end of the US Treasury yield curve and prepare for further significant depreciation of the dollar.
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