US Federal Reserve May Cut Interest Rates in September, Says Goldman Sachs

US Federal Reserve Chair Jerome Powell may slash the policy rate in September 2025, according to research economists at Goldman Sachs. The latest forecast advances the rate cut expectation period by three months. Goldman Sachs Research made a change to its early forecast amid the smaller effects of tariff policies and stronger disinflationary forces. Goldman Sachs reckons that the Federal Reserve Meeting will align with its economists view that there will only be a one-time effect on price levels due to tariffs.

Fears of Softening Job Market Call for Rate Cuts Earlier Than Expected

Goldman Sachs Research pointed out the signs of a softening US job market. David Mericle, Chief US economist in Goldman Sachs Research, David Mericle, expressed that despite a healthy labor market, finding a job has become difficult. Downside risks to payroll figures in the near term also stems from the immigration policy changes and residual seasonality in the data.

When and How Much Rates Will the Fed Cut?

Mericle points out a 25-basis-point cut expectation in September, October and December, besides the same magnitude of rate cuts in March and June 2026. No rate cut expectations are for July 2026. Goldman Sachs Research estimates a terminal rate of 3-3.25% compared to 3.50%-3.75%. Mericle acknowledges that the Goldman Sachs team had anticipated the long-run dot plot of the Federal Open Market Committee to be a little higher. They also want the Federal Reserve Meeting to state that a modestly greater terminal funds rate than long-run neutral is feasible amid unusually high fiscal deficit and easy financial conditions owing to strong risk sentiment.

However, the dot plot remained unchanged in June, and a new Fed chair after the end of the term of the existing chair Jerome Powell, next year, may not believe that robust risk sentiment and large deficits should keep the funds rate higher.

A Look into Inflation and Unemployment in the US

According to Mericle, some Fed officials indicate they could extend support to the cut in the Federal Reserve Interest Rate Meeting in September should inflation prints remain under control. Category-level PCE data demonstrate a less effect from the earlier China tariffs. Survey evidence and alternative data hinted at somewhat less pass-through to consumers in the form of higher prices than the assumption made by Goldman Sachs Research.

Also, an earlier rise in Michigan and Conference Board inflation expectations does not appear to be a roadblock to a rate cut before. Also, signs of disinflationary pressures are apparent. The moderate growth in wages and weak travel demand have contributed to additional disinflationary pressure.

Employment-wise, there is a problem as vacancies have begun to shrink again. Mericle pointed out that although Fed officials have put in their best efforts to set the bar higher for cutting interest rates than in 2019, any weakness in the forthcoming employment report could prompt the Fed Meeting to come up with successive interest rate cuts for some time.