Goldman Sachs: Despite Powell's hawkish stance, still considers a rate cut in December as the baseline forecast

Federal Reserve Chairman Jerome Powell's statements after the October interest rate meeting caught the market off guard, but Goldman Sachs still maintains its baseline forecast for a rate cut in December, believing that the ongoing cooling of the labor market will prompt the Fed to cut rates by another 25 basis points before the end of the year.

Goldman Sachs expects that even if the government shutdown ends next week, the incremental data available to the Fed before the December meeting is more likely to lean towards weakness, which will support a rate cut.

Powell sent hawkish signals after this week's meeting, stating that monetary policy is not on a preset path and that committee members have differing views on the pace of rate cuts. This statement surprised the market, as traders had generally believed that rate cuts in October and December were a foregone conclusion.

The timing of this shift in tone was unexpected. According to existing data, the Fed's assessment of the economic outlook has not changed—core inflation, excluding tariff factors, is close to the 2% target, and the labor market continues to weaken. Nevertheless, Powell's cautious wording still brings uncertainty to the market.

Dot Plot Suggests Rate Cuts Remain Mainstream

Goldman Sachs macro traders Rikin Shah and Cosimo Codacci-Pisanelli pointed out that the September dot plot shows that most committee members view rate cuts as the default option, and there are no signs of improvement in the labor market that would suggest a change in this stance.

The Fed cut rates in October as expected, but Powell's ambiguous stance on a December cut caused market volatility. However, fundamentally, the logic supporting a rate cut remains valid—after excluding tariff impacts, inflation is close to the 2% policy target, and the trend of a cooling labor market has not reversed.

Goldman Sachs believes that while Powell's hawkish statements are noteworthy, the majority opinion reflected in the dot plot still points towards a rate cut. In the absence of evidence of improvement in the labor market, this consensus should not fundamentally change.

Government Shutdown Will Weigh on Employment Data

Even if the government shutdown ends next week, the incremental data the Fed sees before the December meeting may still lean towards weakness. The delayed resignation data from the Department of Government Efficiency (DOGE) will weigh on the October employment report, and November data may also be affected.

The government shutdown will also reduce the reliability of the data itself as a signal, further complicating the Fed's decision-making. In the context of compromised data quality, the committee may be more inclined to rely on existing trends to make judgments.

Goldman Sachs states that betting on a rate cut at the December meeting will ultimately prove to be a good long position, but advises waiting for a better entry point, as there is a lack of immediate catalysts to trigger a market reversal.

Policy Path After 2026 Full of Variables

Looking ahead to 2025 and beyond, Goldman Sachs has repeatedly emphasized that the distribution of the policy path will become more dispersed, with many cross-influencing factors.

Amazon announced this week that artificial intelligence will lead to the layoff of 14,000 employees, which timely reminds the market that, against the backdrop of productivity improvements, the labor market may weaken while economic growth performs well, which could imply a lower neutral interest rate level.

The market has been pricing the terminal rate around 3% for some time, but Goldman Sachs believes there is a lot of uncertainty surrounding this level. Although Goldman Sachs is optimistic about a rebound in economic growth next year, the corresponding interest rate trading strategies remain unclear

Goldman Sachs summarized that Powell's statements have indeed made the market aware of the possibility of different outcomes at the December meeting. However, considering his repeated mentions of a weak labor market and the potentially disappointing employment data for October and November, it is expected that the December meeting will still result in a 25 basis point rate cut. In contrast, the Federal Reserve's policy path in 2026 will be more difficult to predict