The Fed Is Forecast to Cut Rates in December as Employment Cools

Federal Reserve Chair Jerome Powell was more hawkish than many expected during the central bank’s press conference last week. However Goldman Sachs Research still expects policy makers to lower their target rate again this year.

“While the press conference played out somewhat differently than we expected, we have not changed our Fed forecast and continue to see a December cut as quite likely,” David Mericle, chief US economist, writes in the team’s report. Goldman Sachs Research also expects two 25-basis-point cuts in March and June 2026 to a terminal rate of 3-3.25%.

“We suspect that there is substantial opposition on the Federal Open Market Committee (FOMC) to the risk management cuts and that Powell thought it was important to voice other participants’ concerns today in his press conference,” Mericle writes.

Why the Fed may hesitate to cut rates

The FOMC cut its target rate in October for the second time this year, lowering the fed funds rate by 25 basis points to 3.75-4%. The Fed also said it would stop running off its $6.6 trillion balance sheet at the start of December. The principal payments of mortgage backed securities will only be reinvested into Treasury bills.

While most official economic data releases have been suspended by the government shutdown, Powell noted that the available official and alternative indicators suggest that inflation (net of tariff effects) is now close to the 2% target and that the labor market has continued to cool gradually.

And the Fed chair also pointed out that some participants might see the lack of official data as a reason not to cut in December. While careful not to commit to this view himself and to note that “it’ll probably be argued both ways,” he said that some participants might see the absence of data and the greater uncertainty as a reason to slow down and leave policy unchanged.

Is the Fed expected to cut rates?

“We still think that the arguments for a December cut remain intact,” Mericle writes.

The FOMC’s summary of economic projections for September implied that most participants saw a December cut as the baseline, according to Goldman Sachs Research. The Fed’s past packages of risk management cuts (proactive rate cuts to guard against potential risks to the economy) also suggest that a third and final cut is the default.

Labor market data are “unlikely to send a convincingly reassuring message” by the time of the FOMC meeting in December, Mericle adds. Goldman Sachs Research sees signs that the weakness in the US job market “is genuine.” In addition, deferred resignations of government employees instigated by the Department of Government Efficiency are likely to generate a negative payrolls report in October and “weigh a bit on November,” Mericle writes.

And finally, Powell said in the October press conference that he sees the Fed’s monetary policy as modestly restrictive, and that this is one of the reasons that the labor market is still gradually cooling. “Because the FOMC does not want further cooling, this is likely to be a strong argument for another cut,” Mericle writes.

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