Key Takeaways
- Goldman Sachs forecasts three successive quarter-point Fed rate cuts for September, October, and December 2025, signalling a steady easing cycle.
- The projection is predicated on softening economic indicators, particularly in the labour market, and the assumption that inflation will continue its descent towards the 2% target.
- Financial markets appear to be pricing in these expectations, with rate-sensitive equities showing upward momentum and bond yields adjusting lower.
- Key risks to this outlook include unexpectedly persistent inflation or significant geopolitical events, which could compel the Federal Reserve to maintain its current stance.
Goldman Sachs’ latest forecast on Federal Reserve policy has sharpened focus on the trajectory of US interest rates, projecting a steady easing cycle through the end of 2025. With expectations pinned on three successive quarter-point reductions at the remaining FOMC meetings, this outlook underscores a growing consensus that softening economic indicators could prompt the Fed to act more decisively than previously anticipated. Such predictions arrive amid lingering uncertainties around inflation trends and labour market resilience, potentially reshaping investor strategies across asset classes.
Decoding the Rate Cut Sequence
The anticipated cuts, spaced across September, October, and December, reflect a calibrated response to evolving economic data. Analysts at Goldman Sachs suggest this path would lower the federal funds rate from its current 4.25%-4.50% range, aligning with broader market signals of cooling growth. This sequence implies a terminal rate approaching 3.50%-3.75% by year-end, a level that could alleviate borrowing pressures while guarding against recessionary risks. Recent jobs reports, which have shown unexpected softness, lend credence to this view, as they highlight vulnerabilities that might compel the Fed to prioritise employment stability over inflation vigilance.
Expanding on this, the forecast hinges on the assumption that inflation will continue its descent towards the 2% target without reigniting. If incoming data—such as consumer price indices or wage growth figures—supports this narrative, the Fed’s actions could validate Goldman’s projections. However, any upside surprises in inflation metrics might force a reassessment, potentially delaying the October or December moves. This delicate balance illustrates how the bank’s economists are threading the needle between optimism and caution, drawing on models that incorporate tariff impacts and trade uncertainties as potential drags on growth.
Market Reactions and Positioning
Equity markets have already begun pricing in these expectations, with sectors sensitive to interest rates showing heightened volatility. For instance, financial stocks, including those of major banks, have experienced upward momentum on the prospect of a more accommodative policy environment. Goldman Sachs’ own performance metrics reflect this sentiment, underscoring investor confidence in the firm’s macroeconomic insights.
| Goldman Sachs (GS) Metric | Value (as of 5 August 2025) |
|---|---|
| Share Price | ~$726 |
| Intraday Gain | 2.3% |
| 200-Day Average | $599 |
| Trailing Twelve-Month EPS | $45.41 |
| Forward P/E Ratio | 17.47 |
| Estimated Forward EPS | $41.56 |
Bond yields, too, have adjusted, with the 10-year Treasury note dipping in anticipation of lower rates. Investors positioning for this scenario might favour duration-heavy strategies, betting on capital gains from falling yields. Yet, the forecast’s implications extend beyond fixed income; in currencies, a weaker dollar could emerge if cuts materialise as predicted, benefiting emerging markets and commodities. Goldman Sachs’ chief economist has emphasised that such a path would represent a “return to lower rates faster,” particularly if labour data continues to weaken, as noted in recent analyses.
Historical Parallels and Risks
Looking back, similar rate-cutting cycles have often followed periods of economic slowdown, such as the Fed’s actions in 2019 when it trimmed rates three times amid trade tensions. Goldman’s current outlook echoes that episode, projecting a cumulative 75 basis points of easing by December, which could mirror the pace seen in prior easing phases. Historical data from FOMC meetings in comparable environments show that consecutive cuts tend to stabilise markets, with S&P 500 returns averaging positive in the subsequent quarters. However, the 2025 context introduces unique variables, including potential policy shifts under new administrations, which could amplify volatility.
Risks to this forecast include persistent inflation or geopolitical flare-ups that might force the Fed to hold steady. Analyst sentiment, as captured by verified sources, leans towards agreement with Goldman’s view, with many expecting cuts if jobs data prompts concern. For example, market-implied probabilities now assign over 70% odds to a September reduction, per CME FedWatch tools as of early August 2025. This sentiment, drawn from professional trading desks, suggests a building conviction that the Fed will not risk a hard landing.
Strategic Implications for Investors
For portfolio managers, these projections necessitate a re-evaluation of rate-sensitive holdings. Real estate investment trusts and utilities, traditionally buoyed by lower rates, stand to gain, while high-yield debt could see tightened spreads. The firm’s valuation metrics position it as a bellwether for banking sector health in a declining rate environment, where net interest margins might compress but deal-making activity surges.
Model-based forecasts from institutions like Nuveen corroborate this, anticipating the Fed to navigate dual challenges of growth and tariffs. If the unemployment rate ticks higher in upcoming reports—a scenario Goldman flags as a trigger for even steeper cuts, possibly 50 basis points—markets could accelerate their repricing. Investors should monitor the August jobs release closely, as it could cement or upend the outlined path.
Broader Economic Ramifications
Beyond immediate market moves, the forecasted cuts could influence corporate investment decisions, encouraging capital expenditures deferred during high-rate periods. Small businesses, particularly, might benefit from cheaper financing, potentially spurring hiring and expansion. Yet, the international dimension looms large: with the European Central Bank and Bank of England on their own easing trajectories, synchronised global rate reductions could foster a more supportive environment for trade, countering some tariff-induced headwinds.
In summary, Goldman Sachs’ delineation of a three-cut sequence offers a roadmap for what might be a pivotal shift in monetary policy. While not without uncertainties, this outlook provides a framework for anticipating Fed actions, grounded in data-driven analysis. As FOMC dates approach, the interplay of economic indicators will determine whether these expectations hold or evolve.
References
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