Goldman Sachs: The Federal Reserve is more willing to cut interest rates again next year, and employment data may serve as a "trigger" for rate cuts.

Goldman Sachs Group said that after this week's easing policies and Chairman Jerome Powell's significant caution regarding labor market risks, the Federal Reserve may be more willing to cut interest rates further next year than the market previously expected. A lower threshold for rate cuts supports a steeper yield curve, puts pressure on the dollar at the margin, and increases sensitivity to upcoming labor market data. Josh Helfin, Chief Strategist and Director of Financial Risk at Goldman Sachs Global Banking and Markets, said that Powell's comments at a press conference last week suggested that internal concerns at the Federal Reserve about the sustainability of the employment situation are increasing. While the central bank's baseline forecast remains to keep rates steady and evaluate subsequent data, Helfin believes that the threshold for additional rate cuts may be lower than the level of concern before the meeting. Powell acknowledged that the labor market has been gradually cooling, but also warned that recent employment data may have exaggerated potential job growth. He emphasized the significant downside risks to the labor market conditions he described, indicating that the Fed is increasingly sensitive to signs of deterioration rather than overheating. Goldman Sachs believes that this shift in focus makes upcoming labor market data crucial for shaping policy expectations. Helfin said that future jobs reports will be key to determining whether the Fed will resume its loose policy, particularly focusing on the unemployment rate rather than overall nonfarm payroll growth. Looking further into the future, Goldman Sachs expects the easing cycle to continue until 2026, with the federal funds target rate possibly falling to 3% or lower. This outlook reflects a view that inflation will continue to ease, and labor market slack will intensify, giving the Fed room to remove remaining policy constraints. In terms of the rate market, Helfin expects that as short-term yields are lowered due to loose policies, and long-term yields are supported by supply dynamics and term premiums, the yield curve will tend to steepen. For the dollar, the combination of rate cuts and a steepening yield curve suggests a softer medium-term outlook, especially as labor market data confirms the Fed's growing concerns.