The Fed may cut interest rates in September? Goldman Sachs urgently revised report: Mild inflation + cooling job market become key drivers!

Goldman Sachs research department economists said that the Federal Reserve may cut interest rates in September, three months earlier than their previous forecast. Goldman Sachs has adjusted its rate cut forecast because early evidence indicates that the impact of this year's tariff policies is slightly smaller than expected, while other forces suppressing inflation are stronger. Goldman economists believe that tariffs will only have a one-time impact on price levels. In addition, there are signs that the labor market may be softening. Chief US economist David Mericle of Goldman Sachs research department said in a report, "Although the labor market still looks healthy, finding a job has become more difficult." Residual seasonal factors in the data and changes in immigration policies also pose downward risks to recent employment data. When will the Fed cut interest rates? Mericle estimates the likelihood of a rate cut in September to be "slightly higher than" 50%. Mericle's team expects the Fed to cut rates by 25 basis points in September, October, and December, and do the same in March and June of 2026. "If there is any insurance motivation for cutting rates, then cutting rates at consecutive meetings is the most natural thing to do," Mericle said regarding rate cuts in 2025. "We do not expect a rate cut in July." Goldman Sachs research department predicts the terminal rate to be 3-3.25%, down from the previous forecast of 3.5-3.75%. Goldman Sachs expects the Fed to start cutting rates in September. Mericle said that his team had expected the Federal Open Market Committee (FOMC)s longer-run dot plot (summary chart of the FOMC's expectations for the federal funds rate) to move slightly higher. They also anticipated that the Fed would conclude that a terminal federal funds rate slightly above the long-term neutral rate would be appropriate, given the unusually large fiscal deficit and strong risk appetite keeping financial conditions loose. However, the FOMC dot plot remained unchanged in June, and the incoming Fed Chair (Jerome Powells term ends next year) may not agree that the large deficit and strong risk appetite should keep the rate slightly higher. What are the prospects for US inflation and employment? Mericle wrote that some Fed officials suggested that if the upcoming inflation data is not too high, they may support a rate cut at the September meeting. Meanwhile, survey evidence and other data show that the transmission effect of tariffs on consumer prices is slightly lower than Goldman Sachs research had previously expected. Furthermore, previous spikes in inflation expectations from the University of Michigan and business consultants in Michigan no longer seem to be a significant obstacle to early rate cuts: both indicators have fallen, and it appears that more and more people believe that partisan biases and other technical factors have distorted these indicators. There are also signs that anti-inflationary forces are at play. Wage growth is slowing down, catch-up inflation is ending, and weak tourism demand is creating additional anti-inflationary pressure. At the same time, the number of job vacancies in the labor market has started to slowly decline. Mericle said, "Although Fed officials are trying to set a higher threshold for rate cuts in 2019, any panics in the upcoming employment report could make early rate cuts once again the path of least resistance." What are the prospects for the Fed's terminal rate? Goldman Sachs research department has lowered its terminal rate forecast to 3-3.25%, but this does not reflect a change in people's views on the truly neutral long-term rate or the economic situation one year later. Mericle said, "On the contrary, our previous research indicates that slight changes in fund rates have limited impact on the economy, which makes the true neutral rate somewhat unclear." Mericle added that whether the final rate is 3-3.25% or 3.5-3.75%, the economy may stabilize at a level that can be called full employment and 2% inflation. He said, "This ambiguity leaves room for policymakers' understanding of the neutral rate."