Goldman Sachs now expects two Fed rate cuts this year, down from three

Goldman Sachs analysts said they now expect the Federal Reserve to cut interest rates twice this year, down from their prior forecast of three cuts, amid increased concerns over sticky inflation and labor market strength.

GS expects two rate cuts in 2025- in June and December, and one additional cut in 2026, bringing the Fed’s terminal rate to 3.5% to 3.75%, from current levels of 4.25% to 4.5%.

The investment bank’s shift in expectations came just after stronger-than-expected nonfarm payrolls data for December, which spurred increased bets that the Fed will have little immediate impetus to keep cutting interest rates. The reading also triggered steep losses on Wall Street.

The Fed cut rates by 1% through 2024, but warned of a much slower pace of cuts this year. The central bank had effectively slashed its outlook on rate cuts to a projected two from four for 2025, citing concerns over sticky inflation and a strong labor market.

GS analysts said that while their baseline forecast for rates remained somewhat more dovish than market pricing, it was hard to have “great conviction in the timing of cuts” due to expectations of robust U.S. economic data, which made cuts reasonable but not critical.

The investment bank also said that it was uncertain over how the Fed will navigate increases in trade tariffs under incoming President Donald Trump, who will take office next week.

Trump has vowed to impose steep import tariffs on several major U.S. trading partners, especially China. But American importers are expected to pay the tariffs, heralding an increase in domestic goods and services that are reliant on imports.

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Still, GS analysts said they did not expect Trump’s fiscal and immigration policies to have a perceptible impact on inflation, and that tariffs would likely not raise inflation enough to warrant interest rate hikes or to unsettle Wall Street.