Key Insights

Revised Rate Cut Forecast

Goldman Sachs (GS) now expects the Federal Reserve to implement two rate cuts in 2025 (June and December), compared to its earlier projection of three.
An additional rate cut is anticipated in 2026, bringing the Fed’s terminal rate to 3.5%–3.75% from the current 4.25%–4.5%.

Factors Behind the Adjustment

Stronger-than-expected nonfarm payrolls data for December highlights a robust labor market, reducing the urgency for rate cuts.
Concerns about sticky inflation continue to challenge the Fed’s ability to lower rates aggressively.

Fed’s Rate-Cutting History and Forward Guidance

The Fed reduced rates by 1% in 2024 but has signaled a slower pace of cuts this year, adjusting its forecast to two rate cuts instead of the previously projected four.

Economic and Policy Context

Uncertainty in Policy Timing

GS analysts acknowledged difficulty in predicting the exact timing of rate adjustments, citing robust economic data as a mitigating factor against aggressive rate cuts.

Impact of Trade Tariffs Under Trump Administration

President-elect Donald Trump’s impending tariff policies—targeting imports, particularly from China—may lead to higher domestic prices, compounding inflationary pressures.
The extent of these tariffs’ impact remains a variable for the Fed’s monetary policy decisions.

Market Implications

Investor Sentiment

The revised rate outlook suggests a cautious stance on interest rate-sensitive sectors, such as real estate and utilities.
Tools like the Sector P/E Ratio API can help investors gauge sector-specific valuation trends in light of Fed policy.

Trade and Inflation Dynamics

Trade tariffs under the new administration could add upward pressure to inflation, potentially influencing the pace of Fed rate cuts.

Stock Market Volatility

December’s nonfarm payroll report, which triggered market losses, underscores the sensitivity of equity markets to labor market and inflation data.