Goldman Sachs Projects December Fed Rate Cut, Urges Investors to Buy Dip
The investment bank's forecast hinges on a cooling U.S. economy, even as mixed data and divergent Wall Street views create an uncertain path for monetary policy.
Goldman Sachs is calling for the Federal Reserve to begin cutting interest rates in December, advising clients to view recent market pullbacks as a buying opportunity ahead of a shift in U.S. monetary policy.
The influential Wall Street bank updated its forecast, projecting a 25-basis-point reduction next month, citing a continued trend of moderating inflation and a gradually cooling labor market. The guidance suggests investors should maintain an overweight position in equities, signaling confidence that the central bank is poised to pivot from its long-standing fight against inflation.
"The cumulative progress on inflation and the labor market's return to a more sustainable pace of growth provide the backdrop for the Fed to begin normalizing policy," analysts at Goldman Sachs wrote in a recent note. Their rationale is supported by the latest available September inflation data, which showed the consumer price index at 3.0% year-over-year, alongside a labor report indicating a rise in the unemployment rate to 4.4%.
However, the path to a December cut is clouded by unusual data gaps. A recent government shutdown led to the cancellation of the October inflation and non-farm payrolls reports, forcing policymakers and investors to navigate with less visibility. The last jobs report for September was stronger than anticipated, showing 119,000 new hires against expectations of just 50,000, complicating the narrative of a rapidly slowing economy.
Financial markets are largely aligned with Goldman's outlook, though conviction is not absolute. According to the CME FedWatch Tool, traders are currently pricing in a 69% probability of a rate cut at the Fed’s final meeting of the year. While a majority, this reflects a degree of uncertainty given the mixed economic signals and a lack of fresh data points.
This uncertainty is echoed across Wall Street, where a consensus has yet to form. While Goldman is advocating for a near-term cut, other major institutions are more cautious. Morgan Stanley recently revised its forecast, pushing its expectation for the first rate reduction into January 2026, suggesting the Fed may prefer to see more conclusive evidence of an economic slowdown before easing policy.
For investors, Goldman's "buy the dip" call is a strategic bet that the Federal Reserve will successfully engineer a soft landing, curbing inflation without triggering a deep recession. A rate cut would lower borrowing costs for companies, potentially boosting corporate earnings and equity valuations. Such a move would likely put downward pressure on the U.S. dollar and could lead to a rally in fixed-income markets.
All eyes will now turn to the upcoming Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge. The report, scheduled for release on November 26, is expected to show core inflation moderating to 2.7% annually. A weaker-than-expected reading could cement the case for a December cut, validating Goldman's bullish stance and potentially sparking a year-end rally in risk assets.