Goldman Sachs, citing a stinging slowdown in U.S. job growth, said it expects the Federal Reserve to cut interest rates multiple times before the end of the year.
The estimate of job growth trends is now clearly below a low bar at 30k per month, the note said.
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“We suspect that weak job growth and concern about further downward revisions and downside risks have already convinced the Fed leadership to resume rate cuts,” Goldman Sachs analysts wrote in a note.
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Surprising July jobs report still stings
The surprise July jobs report, showing just 73,000 new jobs and sharp downward revisions to May and June, rattled Fed watchers by flipping the labor market narrative almost overnight.
Instead of the steady hiring resilience seen earlier in the year, analysts now see a clear slowdown, with the three-month average dropping to its weakest level since 2010 outside the Covid pandemic.
Related: Expect fiery outcomes from Fed’s Jackson Hole conference this week
Continuing jobless claims dipped, and initial claims fell to about 224,000.
For markets and Fed watchers, the sudden deterioration raised expectations that the Fed may need to pivot toward interest rate cuts soon to prevent further economic weakening, even as elevated inflation complicates that path.
In short, the data injected fresh urgency and new uncertainty into the September rate debate.
Fed appears split over next interest rate cut
The Federal Open Market Committee, the Fed’s benchmark policymaking panel, meets Sept. 17.
The Fed appears to be divided over whether it should make the first interest rate cut of the year or continue the “wait-and-see” approach, pending the impact of tariff inflation as it makes its way down the U.S. supply chain into businesses and consumers.
The Federal Reserve’s dual mandate seeks maximum employment and 2% inflation simultaneously.
In practice, these two goals can sometimes come into tension.
Related: What the star-studded Jackson Hole economic meeting means to you
For example, cutting interest rates can stimulate hiring but also risks fueling inflation. Conversely, raising rates can tame price pressures but may weaken job growth.
The Fed uses the Federal Funds Rate to help keep both sides of the mandate in balance.
The U.S. labor market had shown signs of cooling compared to earlier strength, which had been bolstering Fed interest rate cut expectations.
Jobs revisions change Goldman Sachs' FOMC outlook
Goldman Sachs said that before the July employment report, the U.S. labor market had appeared to achieve “exactly what the FOMC hoped when it first began hiking in 2022: a gentle rebalancing followed by a stabilization.”
Those recent data revisions changed the outlook.
The slowdown, the note said, extends beyond trade and immigration effects. “‘Catch-up hiring’ in a few industries now appears over and job growth outside those industries has fallen to around zero,” Goldman Sachs wrote.
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The note cited weakness in health care payrolls, seasonal hiring, and the way government models account for new businesses.
Goldman Sachs economics analysts David Mericle and Jessica Rindels forecast three 0.25% cuts in September, October, and December, adding two more in 2026.
The analysts added that “future revisions to job growth are more likely to be negative,” citing the payroll model, health care sector reporting, and immigration estimates as areas of concern.
Where the jobs slowdown appears
While the unemployment rate has remained relatively stable, the bank warned that “even modest further softening in the labor market would be concerning,” given that employment is already close to its maximum sustainable level.
The slowdown, they said, extends beyond trade and immigration effects. “‘Catch-up hiring’ in a few industries now appears over and job growth outside those industries has fallen to around zero,” Goldman Sachs wrote.
There’s an 83.2% chance of a 0.25% cut in September, according to the CME Group FedWatch Tool.
The current Federal Funds Rate stands at 4.25% to 4.50%. The last rate cut was in December.
Although a 0.50% cut is not off the table for some market watchers, Goldman Sachs said it “would require a larger rise in the unemployment rate or worse payrolls numbers than we expect.”
Related: Jobs report shocker resets Fed interest rate cut bets
