Goldman Sachs has just revised its outlook on interest rates, nudging them later by a few months.
Although it may seem like a subtle change, it matters for markets that are often conditioned to expect relief much sooner.
Clearly, lower rates support lower borrowing costs, which in turn support valuations, as well as a broader participation in risk-on assets.
Extending that timeline alters the narrative, but it also suggests greater confidence in the economy’s strength.
Goldman’s view underscores an economic environment that appears to be normalizing, backed by benign inflation reports, durable growth, and lower recessionary fears. Having covered the economy and the stock market over the years, at such points, in the past, the Federal Reserve has been more patient, waiting for clearer economic data before adjusting its policies.
It’s also important to note that the Fed’s messaging has, in many ways, been in line with that data-dependent stance. Powell weighed in on the economy in his Dec. 10 press conference.
In addition, for investors, this backdrop usually elevates the impact of fundamentals. Factors such as earnings, balance sheet health, and consumer demand usually take center stage when markets zoom out on near-term policy impact.
Key Points
- Goldman Sachs drops a shock take on Fed rate cuts.
- It lowered the recession risk estimate to 20%, citing a resilient labor market and steady inflation.
- JPMorgan predicts the Fed might go the other way next year.
Goldman Sachs has just revised its outlook on interest rates, nudging them later by a few months.
Although it may seem like a subtle change, it matters for markets that are often conditioned to expect relief much sooner.
Clearly, lower rates support lower borrowing costs, which in turn support valuations, as well as a broader participation in risk-on assets.
Extending that timeline alters the narrative, but it also suggests greater confidence in the economy’s strength.
Goldman’s view underscores an economic environment that appears to be normalizing, backed by benign inflation reports, durable growth, and lower recessionary fears. Having covered the economy and the stock market over the years, at such points, in the past, the Federal Reserve has been more patient, waiting for clearer economic data before adjusting its policies.
It’s also important to note that the Fed’s messaging has, in many ways, been in line with that data-dependent stance. Powell weighed in on the economy in his Dec. 10 press conference.
It doesn’t feel like a hot economy that wants to generate, you know, a Phillips curve kind of inflation. So we look at all those things, and we say that this was a decision to make. Obviously, it wasn’t unanimous. But, overall, that was the judgment that we made, and that’s the action we took.
In addition, for investors, this backdrop usually elevates the impact of fundamentals. Factors such as earnings, balance sheet health, and consumer demand usually take center stage when markets zoom out on near-term policy impact.
The rate-cut cycle since the post-pandemic peak
- Sept. 18, 2024: First cut since 2020 — half-point cut to 4.75% to 5.00%
- Nov. 7, 2024: Quarter-point cut to 4.50% to 4.75%
- Dec. 18, 2024: Quarter-point cut to 4.25% to 4.50%
- Sept. 17, 2025: Quarter-point cut to 4.00% to 4.25%
- Oct. 29, 2025: Quarter-point cut to 3.75% to 4.00%
- Dec. 10, 2025: Quarter-point cut to 3.50% to 3.75% (current range)
- Source: Federal Reserve.gov
Why Goldman sees less urgency
Goldman Sachs now expects the Fed to deliver a couple of quarter-point rate cuts in June and September 2026.
For perspective, the bank had pushed back on earlier expectations that the Fed would cut rates as early as March and June.
So, the federal funds rate will likely finish 2026 somewhere between the 3% and 3.25% mark, pointing to a more restrictive policy than markets had previously assumed.
Simultaneously, Goldman dropped its 12-month recession probability to 20% from 30%, underscoring stronger confidence in the economy’s ability to absorb higher rates.
A big piece of that puzzle is the labor market.
Though job growth cooled off and wage pressures eased, hiring conditions remain mostly stable.
Here’s how the jobs data fared:
- Hiring cooled: December payrolls rose to 50,000, SHRM noted, though unemployment stayed near 4.4%.
- Wages held up: Average hourly earnings jumped to $37.02, up 3.8% year over year. (Source: Trading Economics)
- Momentum slowed: 2025 payroll gains totaled 584,000, according to The Wall Street Journal, dropping from 2 million in 2024 (a cool-off, not a collapse).
On top of that, the latest CPI numbers, near the 2.7% mark, are inching closer to the Fed’s 2% target, CNBC reported, reducing the need for aggressive intervention.
JPMorgan takes a sharper line on the Fed’s next move
JPMorgan is taking an even bolder position on where it believes monetary policy will head next.
It argues that the Fed’s next move might be a rate hike in 2027, Reuters reports, as investors continue pricing in patience. Additionally, the CME FedWatch Tool indicates a 95% likelihood that rates will remain unchanged at the January meeting.
However, the bank does lay out scenarios where we could see rate cuts arriving quicker.