Goldman Sachs warns: The risk of the U.S. economy "re-accelerating" is rising

Goldman Sachs' latest warning indicates that a series of factors are significantly increasing the risk of a "re-acceleration" of the U.S. economy, which will bring a completely different outlook and challenges for the monetary policy path in 2026.

On September 28, Goldman Sachs analysts Cosimo Codacci-Pisanelli and Rikin Shah stated in their latest report that the risk of a re-acceleration of the U.S. economy is rising, a forecast based on multiple favorable factors such as labor market resilience, expectations of fiscal stimulus, and a loose financial environment.

The analysts believe that the current U.S. economy is performing strongly across multiple indicators, with this week's initial jobless claims data being encouraging, while Goldman Sachs' Global Investment Research department expects the U.S. GDP growth rate for the third quarter to reach a healthy 2.6% (quarter-on-quarter annualized rate). This provides strong support for growth in the first half of next year.

The report states that the prospect of economic re-acceleration will have significant implications for the Federal Reserve's monetary policy path, especially in the context of selecting a new chairperson for the Federal Reserve. Goldman Sachs points out that the key question is whether the Federal Reserve will lower interest rates below neutral levels while the economy is performing well, and whether it can implement a rate hike policy during Trump's term.

Multiple Tailwinds Boosting Economic "Re-acceleration"

Goldman Sachs' analysis shows that the U.S. economy is exhibiting strong performance across several key indicators.

According to Goldman Sachs, its U.S. Macro Economic Surprise Index (US MAP surprise index) has recently surged, and this week's initial jobless claims numbers are also encouraging. The Global Investment Research department (GIR) expects the U.S. third-quarter GDP quarter-on-quarter annualized growth rate to reach a healthy level of 2.6%.

The report lists the key factors driving this risk:

Loose financial conditions: The good performance of risk assets, expectations of future rate cuts by the Federal Reserve, and a weaker dollar have collectively created a loose financial environment.

Fiscal and investment: An active fiscal policy pulse is expected in the first half of next year, while capital expenditures in the artificial intelligence sector will continue to provide growth momentum.

Consumers and deregulation: The U.S. consumer base remains solid, and the impact of deregulation cannot be ignored.

Goldman Sachs states that the combination of these tailwinds increases the likelihood of unexpected economic growth next year.

The Monetary Policy Path Depends on the New Federal Reserve Chair's Preferences

Goldman Sachs emphasizes that the Federal Reserve's policy path for 2025 and 2026 presents a completely different story.

For the remainder of this year, Federal Reserve Chairman Jerome Powell's statements this week summarize the current situation well: recent job growth has been below the "break-even" level. Therefore, Goldman Sachs believes:

Tariffs still appear to be a one-time adjustment to price levels, while inflation in the service sector continues to slow.

This provides a path for the Federal Reserve to normalize policy rates closer to neutral levels (in the 3-3.5% range), as maintaining restrictive policies for too long could unnecessarily weaken the labor market further. Goldman Sachs' baseline scenario remains a 25 basis point rate cut in both October and December of this year Regarding the monetary policy path for next year, facing the risk of economic re-acceleration, Goldman Sachs believes that the future largely depends on the judgment of the policy inclination of the new Federal Reserve Chairman. The report raises two core questions:

Even if the economy is running healthily, will the Federal Reserve lower interest rates below neutral levels?

During Trump's potential term in office, does the Federal Reserve have the ability to raise interest rates to respond to an overheating economy?

In response to the uncertainty, Goldman Sachs proposes two distinctly different trading ideas.

• If the market expects the policy rate to remain low (i.e., the Federal Reserve will not or cannot effectively tighten policy), then the correct trade is to go long on longer dated breakevens, go long on gold, and continue to hold risk assets.
• If the market believes the Federal Reserve will respond to economic re-acceleration and tighten policy, then the U.S. Treasury yield curve should become steeper.

The report specifically mentions that the SFRM6/M8 spread, which measures the market's expectations for mid-term interest rates in 2026, is still hovering around flat (currently at -5 basis points), indicating that the market has not fully priced in the risk of rate hikes.

In this scenario, the 2-year and 10-year Treasury yield curve (2s10s) should also steepen.

Risk Warning and Disclaimer

Markets are risky, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk