Goldman Sachs conference call: After non-farm payrolls, the Federal Reserve has "no choice," and in September will debate "whether to cut rates by 25 or 50 basis points."

After the release of a non-farm employment report considered a "game changer," expectations on Wall Street are rapidly shifting.

According to the latest views from Goldman Sachs' trading and research team, the emerging signs of weakness in the U.S. economy have left the Federal Reserve with "no choice" but to initiate a rate-cutting cycle, with market focus shifting from "whether to cut rates" to "how much to cut," leading to a debate over 25 or 50 basis points that may unfold in September.

The investment bank stated that the market currently underestimates the possibility of the Federal Reserve taking more aggressive measures at the September meeting, including a one-time rate cut of 50 basis points. This assessment is based on recent employment data and its significant downward revisions, which have notably increased the risk of an economic "hard landing."

Anshul Sehgal, co-head of Goldman Sachs' FICC (Fixed Income, Currency, and Commodities), clearly pointed out in an internal macro conference call that regardless of how inflation data unfolds in the next two months, rate cuts have become the baseline scenario for the Federal Reserve. He believes that some members of the Federal Open Market Committee (FOMC) may already regret not taking action at the last meeting (in July).

This judgment implies that investors and the market need to prepare for the possibility of the Federal Reserve taking more accommodative actions than expected. Sehgal anticipates that discussions about whether to cut rates by 25 or 50 basis points will dominate the market agenda in the coming months, and this will also apply to the December meeting.

The "Game Changer" Employment Report

Goldman Sachs referred to the latest non-farm employment report as a "game changer," primarily based on several key data points. Anshul Sehgal noted that the number of jobs added to the U.S. economy over the past three months, especially in the private sector, has fallen to its lowest level.

An earlier article from Wall Street Insight reported that the U.S. added only 73,000 jobs in July, far below expectations, with the data for the previous two months significantly revised down by 258,000. The U.S. labor market is no longer just experiencing a "moderate slowdown," but rather a "sharp brake," which could trigger new recession concerns.

At the same time, there are signs of a "slight increase" in the unemployment rate. These signals collectively point to a weakening momentum in the labor market. Given the Federal Reserve's keen focus on the employment market to assess its policy path, the weight of this report is self-evident, providing strong support for those advocating for a prompt easing of monetary policy.

Consumers Under Pressure and Economic Slowdown

The weakness in the labor market is just part of a broader picture of economic slowdown. Goldman Sachs' analysis emphasizes that U.S. consumers are "clearly feeling the pressure." This observation is corroborated by other macro data.

According to Sehgal's analysis, after excluding specific factors, the growth rate of real final sales in the U.S. during the first half of this year has slowed compared to the same period last year. More broadly, this year's GDP growth rate is expected to be about 100 basis points lower than last year. These data collectively paint a picture of weakening economic growth momentum and challenges to domestic demand, thereby increasing the urgency for the Federal Reserve to take action

September Meeting Focus: 25 or 50 Basis Points?

Based on the analysis above, Goldman Sachs believes that the Federal Reserve's policy path has become increasingly clear. Anshul Sehgal asserts that the Federal Reserve has "no choice" but to cut interest rates, which reduces the importance of inflation data in decision-making over the next two months.

Therefore, the FOMC meeting in September will no longer be a suspense about whether to cut rates, but rather a debate about the extent of the rate cut. Goldman Sachs believes that policymakers will weigh whether to cut rates by 25 basis points or more decisively by 50 basis points. This expectation itself marks a significant shift in market sentiment and may continue to influence asset price volatility leading up to the meeting.

If Data Deteriorates, Is a 50 Basis Point Cut on the Horizon?

On August 5, Wall Street Journal article reported that Goldman Sachs and Citigroup's research indicated a very high likelihood of a 25 basis point rate cut by the Federal Reserve in September, and if non-farm data worsens further, a more aggressive 50 basis point cut could occur in September.

In the baseline scenario, Goldman Sachs predicts that the Federal Reserve will cut rates by 25 basis points consecutively in September, October, and December of 2025. Citigroup, in its baseline scenario, predicts that the policy rate will drop to 3% and believes that the risks lean towards even lower interest rate levels.

Meanwhile, dovish forces within the Federal Reserve are gathering, potentially clearing the way for earlier and faster rate cuts