Goldman Sachs: The interest rate cut by the Federal Reserve this week is a foregone conclusion, but the threshold for future easing has been raised.

Goldman Sachs said that the market generally expects the Federal Reserve to cut interest rates by 25 basis points for the third consecutive time at this week's December Federal Open Market Committee meeting, reducing the federal funds rate target range to 3.5%-3.75%. However, this rate cut is expected to be accompanied by a "hawkish" signal, indicating that the threshold for further loosening of policy has increased. Goldman Sachs pointed out in a report that there are sufficient reasons for this rate cut. In terms of the labor market, job growth has been consistently lower than the growth rate of the labor force supply, the unemployment rate has risen for three consecutive months to 4.4%, and various indicators of labor market tightness have weakened. Some alternative data shows that layoffs have recently begun to increase, posing new downside risks. In terms of inflation, tariffs have cumulatively impacted inflation by about 0.5 percentage points, and core personal consumption expenditure (PCE) inflation, excluding the impact of tariffs, has already fallen to around 2.3% this year and is expected to further decline to 2% by the first half of 2026. Even with the impact of tariffs, core PCE inflation is likely to fall to 2.2% by the end of 2026, indicating that inflation risks are diminishing. However, Goldman Sachs added that although a rate cut is almost certain, this meeting may have some hawkish elements. First, the meeting statement may use the phrase "the extent and timing of any additional adjustments" used a year ago, implying that the threshold for further rate cuts will be raised in the future. Second, Federal Reserve Chairman Powell may emphasize the increased threshold for rate cuts at the press conference and explain the opposing views of committee members who are against further rate cuts. Additionally, it is expected that two members will vote against a rate cut, and five members may express a moderately opposing view through the dot plot, setting the appropriate interest rate level for 2025 at 3.875%. However, Goldman Sachs believes that these hawkish signals have already been partially digested by the market and are not likely to bring significant surprises. In terms of economic forecasts, Goldman Sachs predicts that the Federal Reserve will raise the median GDP growth expectations for 2025 and 2026 to 2% (an increase of 0.4 percentage points) and 2% (an increase of 0.2 percentage points), respectively. At the same time, core PCE inflation expectations are expected to be lowered, falling to 3% in 2025 (a decrease of 0.1 percentage points) and 2.5% in 2026, higher than Goldman Sachs' own forecast of 2.2%. In terms of the dot plot, it is expected that there will be one rate cut to 3.375% in 2026 and another rate cut to 3.125% in 2027. Looking ahead to 2026, Goldman Sachs pointed out that with the fading drag of tariffs and fiscal stimulus gaining momentum, GDP growth is expected to moderately rebound, which may help stabilize the labor market. However, there are two major uncertainties: first, employment growth outside the healthcare industry has been negative for six consecutive months, indicating a weak starting point for the labor market; second, companies are increasingly inclined to use artificial intelligence to reduce labor costs, which may inhibit hiring or even worsen layoffs. If the labor market stabilizes and inflation continues to fall to around 2%, the Federal Reserve may transition from a risk management mode to a policy normalization mode. Goldman Sachs predicts that there is a divergence among committee members on the appropriate terminal interest rate, with some believing that 3.5%-3.75% is appropriate and others leaning toward lowering it to 2.5%-2.75%. Ultimately, a compromise may be reached with two more rate cuts of 25 basis points each, lowering the rate to 3%-3.25%. From a probability-weighted perspective, Goldman Sachs' policy path forecast for the Federal Reserve remains more dovish than market pricing.