Goldman Sachs comments on the Federal Reserve's decision: Rate cut expected in October

Goldman Sachs believes that the Federal Reserve's rate cut in September is just the beginning of a new round of easing.

According to news from the trend trading desk, after the Federal Reserve cut rates as expected in September, Goldman Sachs' economic research team published a report indicating that this Federal Reserve meeting released five key signals, collectively pointing to the fact that the Federal Reserve has initiated a new round of rate-cutting cycle.

According to Goldman Sachs' scenario analysis, under the baseline scenario (60% probability), further rate cuts of 25 basis points are expected in October and December. If the labor market deteriorates beyond expectations, a 50 basis point cut may even occur. In March and June next year, the Federal Reserve will implement quarterly rate cuts, ultimately bringing the rate down to 3.0-3.25%.

Signal One: The dot plot shows a more aggressive stance.

The Federal Open Market Committee (FOMC) dot plot shows that committee members narrowly supported three rate cuts this year by a vote of 10 to 9, exceeding Goldman Sachs' previous expectation of two cuts.

Goldman Sachs believes that the leadership of the Federal Reserve is likely to belong to the majority, reflecting that recent weak labor market data has strongly convinced a considerable number of decision-makers.

Signal Two: Policy statement language shifts to easing.

The FOMC's post-meeting statement adopted dovish language similar to that used in September 2024 and in Chairman Powell's speech at Jackson Hole.

The description of the labor market in the statement—"job growth has slowed, and while the unemployment rate has risen, it remains low"—is almost identical to the wording from the September 2024 meeting, after which the Federal Reserve initiated a series of three consecutive rate cuts.

Signal Three: Powell emphasizes concerns about the job market.

In a press conference, Powell stated that the job market "is indeed cooling," and although the labor supply has decreased due to reduced net immigration, the rise in the unemployment rate indicates a more severe decline in labor demand. He emphasized:

We see the labor market softening, and we do not need it to soften further, nor do we want it to soften further.

He specifically mentioned that minority workers and young workers, groups more susceptible to the impacts of a weak job market, are performing worse.

Signal Four: "Insurance rate cuts" are not enough with just one.

Powell characterized this rate cut as a "risk management rate cut," aimed at addressing the downside risks in the labor market.

Goldman Sachs analyzes that this wording resonates with the tone when the Federal Reserve cut rates three times consecutively a year ago.

Historically, Powell's mention of "risk management rate cuts" or "insurance rate cuts" typically does not occur just once.

Goldman Sachs explains that such cuts are intended to respond quickly to potential issues, rather than skipping a meeting and waiting three months to take action. Therefore, they often appear in the form of a "consecutive package."

Signal Five: The bond market pricing requires policy cooperation to be realized.

Additionally, Powell cleverly responded to the question of whether a mere 25 basis point cut could support the economy. He stated that the bond market's pricing of the entire rate-cutting path itself can provide substantial support to the economy.

Goldman Sachs believes that the implication is that the Federal Reserve will need to fulfill this path. Overall, Goldman Sachs' calculated Federal Reserve interest rate path, after probability weighting, appears more dovish than the current market pricing.

This means that if Goldman Sachs' judgment is correct, the market may further digest more rate cut expectations in the future, thereby having a new impact on asset prices