Goldman Sachs: Despite Powell's hawkish stance, it still takes a rate cut in December as the benchmark forecast

The remarks made by Federal Reserve Chair Powell after the October interest rate meeting caught the market off guard, but Goldman Sachs still maintained its benchmark forecast for a rate cut in December. It believes that the reality of the continuous cooling of the labor market will push the Federal Reserve to cut interest rates by another 25 basis points before the end of the year.

Goldman Sachs predicts that even if the US government shutdown ends next week, the incremental data obtained by the Federal Reserve before the December meeting is more likely to be weak, which will provide support for interest rate cuts.

Powell sent out hawkish signals after this week's interest rate meeting, indicating that monetary policy is not on the preset track. Committee members have different views on the pace of interest rate cuts. This statement came as a surprise to the market, as traders had generally believed that interest rate cuts in October and December were a foregone conclusion.

The timing of this tone shift is unexpected. Based on the available data, the Federal Reserve's assessment of the economic outlook has not changed - the inflation rate, excluding tariffs, is approaching the 2% target, and the labor market continues to weaken. Despite this, Powell's cautious wording still brought uncertainty to the market.

The dot plot suggests that interest rate cuts remain the mainstream

Goldman Sachs macro traders Rikin Shah and Cosimo Codacci-Pisanelli pointed out that the September dot plot indicated that the majority of committee members took interest rate cuts as the default option, and there were no signs of improvement in the labor market suggesting that this stance should change.

The Federal Reserve cut interest rates as expected in October, but Powell's ambiguous attitude towards a rate cut in December caused volatility in the market. However, from a fundamental data perspective, the logic in support of interest rate cuts still holds - after excluding the impact of tariffs, the inflation rate has approached the policy target of 2%, and the trend of the labor market's continuous cooling has not been reversed.

Goldman Sachs believes that although Powell's hawkish remarks deserve attention, the majority opinion of the committee reflected in the dot plot still points to a rate cut. In the absence of evidence of improvement in the labor market, this consensus should not undergo a fundamental change.

A government shutdown will drag down employment data

Even if the government shutdown ends next week, the incremental data that the Federal Reserve sees before its December meeting may still be biased towards weakness. The delayed resignation data from the Government Efficiency Department (DOGE) will weigh on the October jobs report and may also affect the November data.

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

Goldman Sachs said that betting on a rate cut at the December meeting will eventually prove to be a good opportunity to go long, but it suggests waiting for a better entry point as there is a lack of a catalyst that immediately triggers a market reversal.

The policy path in 2026 is full of uncertainties

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

Amazon announced this week that artificial intelligence would lead to the company laying off 14,000 employees. This timely reminder to the market that in the context of productivity improvement, the labor market may weaken while economic growth performs well, which could mean a lower neutral interest rate level.

The market's pricing of the terminal rate has been fluctuating around 3% for some time, but Goldman Sachs believes there is a great deal of uncertainty surrounding this level. Although Goldman Sachs is optimistic about the economic growth recovery next year, the corresponding interest rate trading strategy remains unclear.

Goldman Sachs concluded that Powell's remarks did indeed make the market aware of the possibility of a different outcome at the December meeting. However, considering the weak labor market he constantly mentioned and the possible lackluster employment data in October and November, it is expected that a 25 basis point interest rate cut will still be achieved at the December meeting. In contrast, the policy path of the Federal Reserve in 2026 will be even more unpredictable.

Risk Warning and Disclaimer

The market involves risks. Please invest with caution. This article does not constitute personal investment advice and has not taken into account the individual user's specific investment objectives, financial situation or needs. Users should consider whether any opinions, views or conclusions in this article are suitable for their specific circumstances. Any investment made based on this is at your own risk.