Fed Rate Cuts in 2026: What the Latest Outlook Suggests
So, there’s been a lot of talk today about where the US Federal Reserve is heading with interest rates, especially now that Goldman Sachs Research has laid out its current expectations. The situation for December seems almost set in stone: a rate cut is widely anticipated, and nothing on the immediate calendar appears likely to disrupt that. But the bigger question everyone’s trying to understand is what happens in 2026. And that’s where things get a bit more complex.
According to Goldman Sachs’ chief economist Jan Hatzius, the Fed is expected to slow down the pace of its rate cuts next year. This would likely happen as the economy picks up speed again and inflation continues to cool. Interestingly, the delayed September jobs report—despite coming later than usual—reinforced the idea that the labor market is softening. That softer trend might have already secured a 25-basis-point rate cut for the upcoming December 10 FOMC meeting. With the next jobs numbers landing on December 16 and new inflation data on December 18, there’s not much left that could realistically shift that outcome.
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But looking beyond December, predictions become less straightforward. Goldman Sachs suggests that US economic growth could accelerate to somewhere between 2% and 2.5% in 2026. This potential boost would come from easing financial conditions, reduced effects from tariffs, and support from tax cuts. If that plays out, job creation may strengthen again, keeping the unemployment rate just slightly above the 4.4% seen in September.
Under that scenario, Hatzius expects the Fed to pause rate cuts in January, then resume easing in March and June. If those cuts happen, the federal funds rate could settle somewhere between 3% and 3.25%, noticeably lower than today’s 3.75% to 4% range.
Inflation remains a huge factor in this outlook, but Goldman Sachs doesn’t see rising inflation as a major threat to the forecast. Core PCE inflation stayed at 2.8% in September, even with some upward pressure from tariffs and equity-driven effects. Hatzius notes that underlying inflation might already be closer to 2%, and once tariff pass-through fades around mid-2026, actual inflation is expected to drift even lower—assuming equity markets remain stable and no major second-round effects emerge.
However, the risk of deeper rate cuts comes from the labor market, which appears to be weakening more than headline numbers suggest. While September payrolls looked strong at first glance, the underlying trend points closer to 39,000 new jobs—quite a drop. October’s alternative indicators are even softer, and several components of layoff data have risen noticeably. What’s particularly striking is the slowdown in employment for college-educated workers, a group that makes up a large share of both the workforce and total income. If opportunities for this group continue to deteriorate—possibly influenced by AI and efficiency-driven changes—it could weigh heavily on consumer spending and push the Fed toward more aggressive cuts later on.
So, while December looks clear, the road ahead in 2026 could still shift depending on how growth, inflation, and especially the job market evolve.
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