Goldman Sachs Predicts 25% Rate Cut in October as Fed Signals Easing Cycle

Goldman Sachs has expressed optimism that the Federal Reserve will lower interest rates in October, citing five key signals that indicate the beginning of a new easing cycle. The firm believes that the Fed's recent policy decisions and statements suggest a more dovish stance, which could lead to further rate cuts in the coming months.

The first signal is the dot plot, which shows that a majority of Fed officials support three rate cuts this year, exceeding previous expectations of two cuts. This shift in stance is likely due to recent weak labor market data, which has convinced a significant number of policymakers to support further easing.

The second signal is the change in the policy statement's language, which has adopted a more dovish tone similar to that used in September 2024. The statement's description of the labor market, which noted a slowdown in job growth and a slight increase in unemployment, is nearly identical to the language used in the September 2024 meeting, which preceded a series of three consecutive rate cuts.

The third signal is the emphasis placed on labor market concerns by the Fed Chair. During the press conference, the Chair highlighted the cooling of the labor market, noting that while labor supply has decreased due to reduced net immigration, the increase in unemployment indicates a more significant decline in labor demand. The Chair also expressed particular concern for minority and young workers, who are more vulnerable to labor market weakness.

The fourth signal is the characterization of the recent rate cut as a "risk management" or "insurance" cut, aimed at mitigating downside risks to the labor market. This language is reminiscent of the Fed's stance a year ago, when it implemented three consecutive rate cuts. Historically, such cuts have not been one-off events but have instead been followed by additional cuts in subsequent meetings.

The fifth signal is the Fed Chair's response to questions about whether a 25 basis point rate cut is sufficient to support the economy. The Chair noted that the market's pricing of the entire rate cut path itself provides substantial support to the economy, implying that the Fed will need to follow through on this path. Goldman Sachs interprets this as a commitment by the Fed to deliver on its dovish guidance.

Overall, Goldman Sachs' probability-weighted analysis of the Fed's rate path is more dovish than the current market pricing. This suggests that if Goldman Sachs' assessment is accurate, the market may need to digest further rate cut expectations, which could have new implications for asset prices. The firm expects the Fed to continue lowering rates by 25 basis points in October and December, with additional quarterly cuts in 2025, bringing the federal funds rate down to a range of 3.0-3.25%.