Goldman Sachs Previews Non-Farm Payrolls: Data Needs to Be 'Substantially Surprising' to Shake Up Fed's Rate Cut Expectations for April

Goldman Sachs analysts have indicated that the upcoming non-farm payrolls (NFP) report will need to be 'substantially surprising' to significantly alter market expectations for Federal Reserve rate cuts this year. Investors are currently pricing in two rate cuts for 2026, and the data will serve as a key indicator for Fed policymakers, who have stated that employment trends are central to their decision-making process.

The latest labor market data, including jobless claims and regional economic indicators, have not yet generated enough momentum to shift expectations for the Fed's monetary policy. The unemployment rate is projected to dip to 4.5% in December, a slight improvement from the 4.6% recorded in November, but this trend alone may not prompt a change in the Fed's cautious stance according to economic analysis.

Market participants are closely monitoring the NFP report as it could influence the likelihood of a rate cut in March. Current odds show a roughly 45% probability of a cut in March, with a less than 15% chance of a move in January.

Why Did This Happen?

The Federal Reserve has emphasized the importance of maintaining a stable labor market while managing inflation risks. Fed officials, including Presidents Thomas Barkin and Neel Kashkari, have highlighted the delicate balance between keeping unemployment low and preventing further deterioration in the job market.

Investors are not expecting dramatic changes from the January meeting, but the NFP report will provide clarity on the pace of employment growth. Goldman Sachs analysts note that any deviation from the expected 60,000 job creation figure could influence the timing and magnitude of rate cuts.

How Did Markets React?

The U.S. dollar has shown resilience at the start of 2026, supported by the Fed's dovish stance and market expectations of slower rate reductions. However, a weaker-than-expected NFP result could trigger a sell-off in the dollar and a surge in the EUR/USD pair.

Conversely, if the report shows strong job growth and a declining unemployment rate, it could reinforce the argument for maintaining the current interest rate and reduce the chances of a rate cut in the near term. This would likely support the dollar and pressure European currencies.

What Are Analysts Watching Next?

The Federal Reserve's upcoming policy meeting in January will be a critical juncture, with officials expected to assess the latest economic data before making a decision. Market pricing suggests that the Fed may hold rates steady through the first half of 2026, with the first cut potentially occurring in March.

Goldman Sachs and other analysts are also tracking the impact of broader economic trends, including the effects of President Donald Trump's tax and spending policies. The Congressional Budget Office has projected that the unemployment rate will peak at 4.6% in 2026 before declining to 4.4% by 2028, supported by the new fiscal measures.

Treasury Secretary Scott Bessent has been advocating for more aggressive rate cuts, arguing that lower interest rates are essential for sustaining economic growth. His remarks have added to the pressure on the Fed to act, even as policymakers remain cautious about the risks to inflation and employment according to economic analysis.

The final decision will depend on how the latest data aligns with the Fed's dual mandate of price stability and maximum employment. Any significant deviation from the expected trend could prompt a reevaluation of the Fed's policy path, particularly if the labor market shows signs of softening further according to economic forecasts.