Goldman Sachs has revised its outlook regarding the US Federal Reserve’s interest rate policy, now predicting that the Fed will maintain its current rates throughout 2026, with the first reductions coming only in June and December of 2027. This represents a postponement compared to previous forecasts, which anticipated rate cuts at the end of 2026 or the beginning of 2027.
Stronger US labor market shifts expectations
The change in Goldman Sachs’ forecast is rooted in unexpectedly robust US employment data. Goldman economist David Mericle highlighted that recent figures show continued resilience in the labor market, eliminating any urgent need for the Fed to initiate short-term rate reductions.
David Mericle stated that the unemployment rate is expected to increase only modestly to 4.4% this year, which does not indicate significant labor market deterioration that would justify a rapid rate cut.
The bank has revised its unemployment estimate downward to 4.4% from the previous 4.6%. While some signs point to a slowdown in economic activity, headline statistics do not create enough pressure on the Fed for swift easing, according to Goldman.
Three causes behind persistent inflation
Goldman Sachs pointed to three main factors sustaining elevated inflation: rising trade tariffs, increased oil prices stemming from Middle East geopolitical tensions, and unexpectedly strong demand driven by investment in artificial intelligence. The bank cautions that these factors may keep inflationary pressures in place well into 2026.
In this context, core PCE (Personal Consumption Expenditures) inflation is expected to remain above 3% through 2026. Goldman believes inflation will only start approaching the Fed’s 2% target after 2027 begins.
Glossary: Core PCE refers to the Personal Consumption Expenditures price index, calculated by excluding volatile items like food and energy. The Fed closely monitors this indicator to track inflation trends.
Mericle further noted that the pace of wage growth currently lags about 0.5 percentage points below the level considered consistent with stable 2% inflation. He added that forward-looking rental price indicators also remain subdued, suggesting that inflation may ease once temporary pressures subside.
Interest rate hike possibility revised upward
Goldman Sachs has adopted a more cautious stance on rate cuts while also acknowledging a higher chance of a rate hike. The bank now estimates the probability of a rate increase at 20%, up from 10% previously. However, the base scenario still does not anticipate any additional hikes.
The bank continues to project a terminal rate in the 3% to 3.25% range. Goldman Sachs commented that an extended period of holding rates steady may lead Fed officials to conclude that maintaining current levels is appropriate.
Goldman Sachs emphasized that its probability-weighted forecast remains notably more dovish than prevailing market expectations.
A similar projection was recently offered by Nomura last month. Meanwhile, data from CME FedWatch show that market participants are pricing in a 75.5% likelihood of a rate hike by the end of the year. The Fed has not issued an official response to Goldman Sachs’ latest outlook.
