Goldman Sachs economists no longer anticipate a Federal Reserve interest rate reduction this year, citing continued labor market strength as a key factor. The bank’s updated projections now place possible rate cuts in June and December of 2027, adjusting from earlier expectations for the end of 2026 and early 2027.
The US investment bank wrote in a note that the probability of the Fed increasing rates remains limited. The report pointed to reduced risk of inflation becoming persistent, making a rate hike scenario unlikely even as central bank officials adopt a more cautious stance.
The revision follows stronger-than-expected U.S. employment gains in May, which surpassed all analyst forecasts. This upbeat jobs data has prompted some market participants to anticipate a possible rate increase this year, as the Federal Reserve seeks to address inflationary pressure linked in part to the ongoing Iran war. In response, bond markets have factored in a potential quarter-point hike by December, while technology stocks, represented by the Nasdaq 100, registered a 5% decline last Friday.
Despite the labor market’s resilience and a firmer economic data backdrop, Goldman Sachs still views the likelihood of near-term rate hikes as low. However, the bank has raised the probability for small increases to 20%, compared to 10% previously, amid firmer messaging from Fed officials.
Goldman’s research also noted that the Fed’s outlook for the longer-term policy rate has not changed substantially in the past year. Most central bank officials still characterize current settings as mildly restrictive and expect conditions to normalize once inflation moderates.
While Goldman Sachs continues to forecast two quarter-point rate reductions next year, it now assigns only a 30% chance to that scenario, a decline from 40% before. The analysts also indicated that holding rates steady is a realistic outcome. Persistent strong investment demand, particularly from the artificial intelligence sector, could influence the Fed to delay easing initiatives for longer.
In addition, Goldman Sachs revised its U.S. unemployment estimate downward for this year, forecasting a jobless rate of 4.4% rather than the previously expected 4.6%.
