Goldman Sachs analysts think two more rate cuts are coming this year, here is why

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Goldman Sachs analysts believe another Federal Reserve interest rate cut is coming soon.

The Federal Open Market Committee lowered the federal funds rate by 25 basis points to 4-4.25% and strongly hinted that another rate cut is very likely in October, said David Mericle, economist at Goldman Sachs.

He expects 25-basis-point cuts in both October and December, potentially followed by two additional cuts in 2026 to reach a target rate of 3-3.25%.

Economists at Goldman Sachs anticipate an October cut due to several dovish signals observed during the recent meeting. The median dot plot showed three cuts this year by a narrow 10-9 margin, suggesting “quite a few participants were swayed strongly by the softer recent labor market data,” Mericle said. “We think it is very likely that the Fed leadership is in the majority group.”

The FOMC statement incorporated distinctly dovish language similar to that used in September 2024 and in Chair Powell’s Jackson Hole speech. The description of the labor market – characterized as “job gains have slowed, and the unemployment rate has edged up but remains low” – was almost identical to language used in September 2024 when the FOMC delivered the first of three consecutive cuts, Mericle said.

Chair Powell’s comments on labor market conditions were also particularly revealing. “Powell noted that the labor market is ‘really cooling off,’” and specifically mentioned that minority workers and young workers are experiencing worse conditions, Mericle said.

In addition, Powell’s key message was clear and direct: “we see that the labor market is softening, and we don’t need it to soften anymore, and we don’t want it to,” language reminiscent of when the Fed cut rates three times a year ago.

Powell characterized the recent decision as “a risk management cut” in response to downside risks in the labor market. Mericle said that historically, such “insurance cuts” have typically come in consecutive packages rather than skipping meetings, as the Fed seeks to address potential problems quickly rather than waiting three months between actions.

Lastly, when questioned about whether a single 25 basis points rate cut would provide meaningful economic support, Powell emphasized that “you have to look at the whole path.”

This statement suggests the Fed is counting on the impact of bond markets (US10Y [https://seekingalpha.com/symbol/US10Y]), (US2Y [https://seekingalpha.com/symbol/US2Y]), (US30Y [https://seekingalpha.com/symbol/US30Y]) anticipating a series of future rate cuts, which could indeed have a significant effect if the FOMC delivers on that expected path, Mericle concluded.

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