Goldman Sachs Research doesn’t expect the Federal Reserve to lower rates until 2027. David Mericle, chief US economist, has pushed his projection for the final two rate cuts in this cycle to June and December 2027 (from December 2026 and March 2027 previously).

US economic activity and labor market data “have been stronger than we anticipated in recent months, with job growth in particular picking up impressively,” Mericle writes in a report.

Goldman Sachs Research still anticipates that GDP growth will be somewhat below potential in the second half of this year, as higher oil prices weigh on spending. But the team now expects the unemployment rate, which stood at 4.3% in May, to rise only a touch further this year to 4.4%, down from a previous forecast of 4.6%. 

This rise in unemployment would not be “enough to create a sense of urgency to lower the funds rate,” Mericle writes.

What is the forecast for US inflation in 2026?

The team estimates that the most natural path for the Federal Open Market Committee (FOMC) is to delay further cuts until the effects of tariffs, higher oil prices and other effects of the war in the Middle East, and the effects of artificial intelligence (AI) demand have faded.

Policy makers are also likely to delay cuts until year-over-year core personal consumption expenditures (PCE) inflation, at 3.3% in April, is closer to the Fed’s 2% target.

“While tariff effects should begin to fade soon, the combined impact of these three forces is likely to remain roughly steady this year, keeping year-over-year core PCE inflation at 3%+ throughout 2026,” Mericle adds.

Fundamental drivers of inflation look softer. Wage growth is running half a percentage point below the rate that Goldman Sachs Research estimates to be compatible with 2% inflation. Leading indicators of rent growth also remain very low. As a result, our economists expect inflation to fall to close to 2% in 2027, if there are no further supply shocks.

Could the Fed hike rates this year?

Mericle says Fed rate hikes are unlikely—though somewhat more likely than initially thought. 

Historically, the Fed has not usually increased rates in response to oil shocks that seemed unlikely to spark sustained high inflation, Mericle points out. And our economists have not yet seen signs that the inflation shock from the war is broadening out—their composite indicator of the risk of more persistent inflation is still at a low level, although a jump in University of Michigan long-term inflation expectations has pushed it slightly higher.

That said, commentary from the Fed has turned more hawkish in recent weeks, with many FOMC participants saying that hikes are possible if inflation worsens.

The resilient economic activity and employment data also lower the bar for a rate hike, according to Goldman Sachs Research. “A stronger starting point for the economy reduces the risk that a hike could end up looking like a costly mistake,” Mericle writes.

What is Goldman Sachs Research’s latest Fed forecast?

Goldman Sachs Research expects the Fed to deliver cuts to the key fed funds rate in June and December next year, bringing it to a terminal rate of 3-3.25% (the policy rate is 3.5% to 3.75% now).

Our economists have left their estimate of the terminal rate unchanged, “though we continue to have mixed feelings about this forecast,” Mericle writes. The team has long argued that when the fiscal stance and broader financial conditions are unusually easy, the funds rate should remain somewhat above the long-run neutral rate—the level at which monetary policy is neither stimulating nor restricting economic growth. Mericle also emphasizes that the true neutral rate is “somewhat fuzzy,” which leaves room for the perceptions of FOMC members to matter in policy decisions.

These factors present a case for leaving the funds rate at its current level, Mericle writes. But the FOMC’s median longer-run interest rate estimate has remained quite stable over the past year, and most participants still describe the policy stance as mildly restrictive and envision further normalization once inflation comes down.

That said, a longer pause before the next cut would “provide more time for solid economic performance to convince FOMC participants that the funds rate is already in an appropriate place,” Mericle writes. And the argument that unusually strong investment demand for AI calls for a higher funds rate, at least for now, could gain greater traction, he adds.

“As a result, we see a flat path as a plausible alternative to our baseline,” Mericle writes. Goldman Sachs Research’s probability-weighted Fed forecast remains somewhat below its baseline forecast and is meaningfully below market pricing.

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