Goldman Sachs firmly believes that the Federal Reserve will still cut interest rates twice this year and will continue to cut four times in the first half of next year

Goldman Sachs Chief Economist Jan Hatzius still believes that the Federal Reserve will fulfill its earlier indication of two rate cuts by the end of the year, especially after last week's weaker-than-expected employment report. He expects that this situation will persist into the first half of 2025.

In a report released last Sunday, Hatzius stated, “We expect the Federal Reserve to cut rates four times consecutively in the first half of 2025, with the final rate dropping to 3.25%-3.5%, but we have greater uncertainty regarding the pace of rate cuts and the ultimate target for the Fed next year,” he added that his forecast is about 50 basis points higher than the market consensus.

He is also uncertain whether the Federal Reserve will have enough information to change its course before next year. He said, “Potential fiscal policy changes after the election are another source of risk for the Fed's path, although this may be in the more distant future. Even once the election results are known, the Federal Open Market Committee (FOMC) may wish to wait for more clear information about what actual policy changes will be made before reconsidering its economic outlook and rate cut plans.”

Of course, the labor market is slowing down; even without the impact of last week's hurricane and strike, the average monthly job growth over the five months ending in September was 156,000, down from 182,000 from January to May.

Nevertheless, given that the U.S. GDP growth rate for the third quarter was 2.8%, the unemployment rate was 4.1%, and corporate profits are still growing at nearly double-digit rates, the likelihood of a “no landing” scenario for the world's largest economy is far greater than any recent recession risk.

David Russell, Global Market Strategist at TradeStation, stated after the U.S. released its third-quarter GDP report last week, “Goldilocks is coming, inflation is becoming a thing of the past, the economy is returning to its original state, consumption is strong, and prices are moderate.”

Unexpected Risk: Can Powell Keep His Job?

That said, one unexpected risk in the Federal Reserve's rate-setting process next year is the fate of Powell himself, who was appointed by former President Donald Trump and was reappointed during President Biden's term. His term is currently set to end in May 2026.

Trump has stated that he would not fire Powell. However, he also indicated that he could do so if he wanted (a view that few legal scholars confirm) and insisted earlier this year that the president “should at least have a say in monetary policy.”

He previously told reporters at a press conference at his Mar-a-Lago estate in Palm Beach, Florida, “As far as I'm concerned, I made a lot of money. I was very successful. I think my intuition is better than that of many Federal Reserve members or the chair in many cases.”

In this context, market predictions regarding the long-term path of interest rates (in this scenario, borrowing increases to pay for promised tax cuts, while growth may slow due to the pressure of record tariffs on imported goods) are difficult even in the best of circumstances In addition, the fate of the tax cuts implemented in the 2017 Tax Cuts and Jobs Act will also face a test, as the policy is set to expire next year and will encounter a significant battle in Congress for an extension.

The Federal Reserve is still pushing interest rates

A president eager to express opinions on interest rates or attempting to remove the Federal Reserve Chair would make predicting the Fed's near-term interest rate path nearly impossible.

Mike Goosay, Chief Investment Officer of Global Fixed Income at Principal Asset Management, believes otherwise, stating that as the Federal Reserve continues to maintain a dovish stance, the bond market will strengthen.

He said, "Ultimately, although the election results will lead fixed income investors to reposition in the short term, inflation and labor data will continue to drive the Fed to take action in the medium to long term, and should support further rate cuts as the Fed is easing restrictions."

Goosay added, "We believe that the recent rise in U.S. Treasury yields and the possibility of yields rising further due to the election results provide an attractive entry point for fixed income, and in addition to favorable initial yields, fixed income will also benefit from the duration advantage brought by Fed rate cuts."