Goldman Sachs Research expects the Fed to cut rates in June and December 2027 (compared with December 2026 and March 2027 previously).
The team projects that the US Federal Reserve will reduce interest rates until 2027. Chief US economist David Mericle has shifted his forecast for the final two rate cuts of this cycle to June and December 2027, moving them from his previous projections of December 2026 and March 2027.
US economic activity and labor market figures “have been stronger than we anticipated in recent months, with job growth in particular picking up impressively,” Mericle writes in a report.
Goldman Sachs Research continues to project that GDP growth will remain somewhat below potential during the second half of this year, as elevated oil prices act as a drag on spending. However, the team now anticipates that the unemployment rate, which was 4.3% in May, will climb only slightly to 4.4% this year, a decrease from their earlier estimate of 4.6%.
This marginal increase in unemployment would not be “enough to create a sense of urgency to lower the funds rate,” Mericle writes.
What is the forecast for US inflation in 2026?
The team believes the most logical path for the Federal Open Market Committee (FOMC) is to postpone additional cuts until the impacts of tariffs, higher oil prices, geopolitical tensions in the Middle East, and the effects of artificial intelligence (AI) demand have subsided.
Policymakers are also likely to wait to cut rates until year-over-year core personal consumption expenditures (PCE) inflation, which sat at 3.3% in April, moves closer to the Fed’s 2% objective.
“While tariff effects should begin to fade soon, the combined impact of these three forces is likely to remain roughly steady this year, keeping year-over-year core PCE inflation at 3%+ throughout 2026,” Mericle adds.
Underlying inflation drivers appear more moderate. Wage growth is currently half a percentage point lower than the level Goldman Sachs Research considers consistent with 2% inflation. Furthermore, leading indicators for rent growth remain quite low. Consequently, our economists anticipate that inflation will decline toward 2% in 2027, provided there are no additional supply shocks.
Could the Fed hike rates this year?
Mericle notes that while Fed rate hikes are unlikely, they are somewhat more plausible than previously thought.
Historically, the Fed has not typically raised rates in response to oil shocks that do not appear likely to trigger sustained high inflation, Mericle observes. Additionally, our economists have not yet detected signs that the inflation shock resulting from the war is broadening—their composite indicator for the risk of persistent inflation remains low, although a spike in long-term inflation expectations from the University of Michigan has nudged it slightly higher.
Nevertheless, Fed commentary has shifted toward a more hawkish tone in recent weeks, with numerous FOMC participants suggesting that hikes remain an option if inflation trends worsen.
The resilience of economic activity and employment data also lowers the threshold for a rate hike. “A stronger starting point for the economy reduces the risk that a hike could end up looking like a costly mistake,” Mericle writes.
What is Goldman Sachs Research’s latest Fed forecast?
Goldman Sachs Research anticipates that the Fed will implement cuts to the key fed funds rate in June and December of next year, resulting in a terminal rate of 3-3.25%, down from the current policy rate of 3.5% to 3.75%.
Our economists have maintained their terminal rate estimate, “though we continue to have mixed feelings about this forecast,” Mericle writes. The team has long maintained that when the fiscal environment and broader financial conditions are unusually loose, the funds rate should stay somewhat above the long-run neutral rate—the point where monetary policy is neither stimulating nor restricting economic growth. Mericle also stresses that the true neutral rate is “somewhat fuzzy,” which allows for the subjective views of FOMC members to influence policy decisions.
These factors provide a rationale for maintaining the funds rate at its current level, Mericle writes. However, the FOMC’s median estimate for the longer-run interest rate has remained stable over the past year, and most participants continue to describe the current policy stance as mildly restrictive, envisioning further normalization once inflation subsides.
That said, a longer pause before the next cut would “provide more time for solid economic performance to convince FOMC participants that the funds rate is already in an appropriate place,” Mericle writes. He adds that the argument that robust investment demand for AI necessitates a higher funds rate, at least for the time being, could gain more support.
“As a result, we see a flat path as a plausible alternative to our baseline,” Mericle writes. Goldman Sachs Research’s probability-weighted Fed forecast remains slightly below its baseline projection and is significantly lower than current market pricing.
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