Here is Why the Fed May Cut Rates Earlier Than Expected, According to Goldman Sachs

Goldman Sachs now expects the Federal Reserve to begin cutting interest rates sooner than previously anticipated, forecasting the first reduction as early as September 2025.

This marks a shift from the firm’s earlier projection of a December timeline, driven by signs of easing inflation and the milder-than-expected impact of tariff policies.

The revised outlook suggests that the central bank’s terminal interest rate could settle between 3.00% and 3.25%, down from the earlier estimate of 3.50% to 3.75%. According to Goldman Sachs, a range of disinflationary forces—including softer wage growth, weaker consumer demand in travel, and declining inflation expectations—support this adjustment. Tariffs on Chinese goods, once feared to stoke consumer prices, have had a muted effect, further reinforcing the case for earlier monetary easing.

Disinflation Trends and Labor Market Cooling

Chief U.S. Economist David Mericle noted that the probability of a rate cut in September is now “a little over 50%.” He and his team project five cuts of 25 basis points spread across September, October, and December of this year, followed by additional reductions in March and June 2026. However, a July cut is considered unlikely.

The report also flagged subtle signs of weakening in the labor market. While employment figures remain relatively strong, indicators suggest that it has become harder for job seekers to secure positions. Seasonal factors and recent shifts in immigration policy may also pose short-term downside risks for employment trends.

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Policy Flexibility and Future Outlook

Goldman Sachs emphasized that its downward revision of the terminal rate isn’t rooted in a re-evaluation of the long-term neutral interest rate, but rather reflects current market conditions and policymakers’ interpretations. Mericle acknowledged the uncertainty surrounding the true neutral rate, suggesting that the Fed may keep its rate path flexible as economic data evolve.

This updated forecast positions Goldman Sachs at the forefront of market expectations, suggesting that monetary easing could begin well before year-end—potentially reshaping both equity and fixed-income market strategies in the months ahead.