Here’s a bold prediction that might surprise you: Goldman Sachs is now suggesting the Federal Reserve could be more open to cutting interest rates again next year than most investors initially thought. But here’s where it gets controversial—this shift comes on the heels of this week’s policy easing and a notably cautious tone from Fed Chair Jerome Powell, who has been increasingly vocal about risks in the job market. For instance, recent data, such as the rise in the U.S. unemployment rate to a four-year high (as reported by InvestingLive Americas), has raised eyebrows and fueled concerns about economic stability (https://investinglive.com/news/investinglive-americas-market-news-wrap-us-unemployment-rate-rises-to-four-year-high-20251216/).
Josh Schiffrin, Chief Strategy Officer and Head of Financial Risk at Goldman Sachs Global Banking & Markets, points out that Powell’s recent press conference signaled a growing unease within the Fed about the long-term health of the job market. While the central bank’s baseline plan is to hold rates steady and monitor incoming data, Schiffrin argues that the threshold for additional cuts may be lower than many anticipated going into the meeting. And this is the part most people miss—Powell’s acknowledgment that the labor market is cooling gradually, coupled with his warning that recent employment data might overstate job growth, suggests the Fed is more focused on preventing deterioration than combating overheating.
This subtle but significant shift in focus means upcoming labor-market data will be under the microscope, shaping policy expectations in real time. Schiffrin emphasizes that the next few employment reports—particularly the unemployment rate rather than headline payroll numbers—will be critical in determining whether the Fed resumes easing. Looking ahead, Goldman predicts the easing cycle could extend into 2026, with the fed funds target rate potentially dropping to 3% or lower. This outlook assumes inflation will continue to moderate while labor-market slack increases, giving the Fed leeway to ease policy further.
In the rates markets, Schiffrin forecasts a steeper yield curve as short-term yields fall in response to looser policy, while longer-term yields remain supported by supply dynamics and term-premium factors. For the U.S. dollar, this combination of lower rates and curve steepening suggests a softer medium-term outlook, especially if labor data confirms the Fed’s growing concerns. But here’s the thought-provoking question—is the Fed’s increased sensitivity to labor-market risks a prudent move, or could it lead to over-easing and unintended consequences? Let us know your thoughts in the comments—this is a debate worth having.
