The Federal Reserve may have delivered its first rate cut in nine months on Wednesday — but according to Goldman Sachs, it likely won't be the last.
In a new note to clients on Thursday, Goldman Sachs chief U.S. economist David Mericle said the Fed's 25-basis-point cut to a target range of 4.00%–4.25% is the opening move in what could become a sustained easing cycle, as economic risks shift from inflation to employment.
"We continue to expect 25bp cuts in October and December — with a 50bp cut possible if the labor market weakens more than we expect," Mericle wrote. He added that two more cuts in 2026 could bring rates down to 3.00%–3.25%.
September Cut Signals A Series
Mericle highlighted five key takeaways from the September FOMC meeting that support his case for continued rate reductions.
- The "dots" point lower: The Fed's updated Summary of Economic Projections (SEP) showed a median forecast for three rate cuts this year, outpacing Goldman's expectation of two. That 10-9 split in favor of more aggressive easing, Mericle said, likely reflects the influence of Fed leadership reacting to softer labor data.
- Familiar dovish language is back: The FOMC's statement mirrored the tone used in September 2024 and at Powell's Jackson Hole speech — both moments that preceded consecutive rate cuts. Phrases like "job gains have slowed" and "downside risks to employment have risen" show the Fed is growing increasingly concerned about the labor market.
- Powell is focused on the labor market — especially vulnerable groups: The Fed Chair acknowledged that while overall unemployment remains low, the labor market is cooling. He specifically highlighted rising challenges for minorities, young workers, and a cyclical decline in labor force participation — echoing the Fed's tone before its 2019 "insurance cut" cycle.
- This was a "risk management" cut — and those don't come alone: Powell described Wednesday's decision as a precautionary step in response to downside risks. Mericle noted that similar moves in the past have usually been followed by consecutive cuts, not stand-alone actions.
- Powell stressed the full path matters: In a nod to the bond market's expectations, Powell said the economic impact of rate cuts depends not just on today's move but on the path ahead — signaling a willingness to meet market expectations if downside risks persist.
What Could Accelerate The Pace Of Cuts?
While Goldman's base case includes 25bp cuts in both October and December, Mericle flagged that a larger 50bp cut could come if labor market data deteriorates more rapidly than expected.
That would mirror past Fed strategies — notably in 2019, when the Fed front-loaded its easing cycle as downside risks intensified.
Goldman's projected policy path remains slightly more dovish than current market pricing, suggesting traders may still be underestimating the Fed's willingness to cut.
Still, Mericle emphasized that while the Fed isn't panicking, its tone has clearly shifted.
"The strong vote for the 25-basis-point cut suggests that members, while acknowledging that downside risks to the job market have increased, are not panicking about the state of the economy," he wrote.
Speculators are currently pricing in an 88% probability of another Fed rate cut in October, and a 75% chance of a follow-up cut in December, according to the CME FedWatch Tool.
With the October FOMC meeting just weeks away, the focus now shifts to incoming labor market and inflation data. If job growth continues to slow or unemployment ticks higher, the Fed may be compelled to act again — especially if inflation stays contained.
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