Goldman Sachs: Although the Federal Reserve is hawkish, Powell leans dovish, still expecting three rate cuts next year

Last night, the Federal Reserve lowered interest rates by 25 basis points as expected, but the dot plot indicates that only two rate cuts are expected in 2025, not the three previously anticipated by the market. After receiving this signal, the market quickly adjusted its expectations, now forecasting a 32 basis point cut in 2025, down from the previous 50 basis points.

However, Goldman Sachs analyst Jan Hatzius and his team released a report stating that they still maintain a more dovish outlook, expecting rate cuts in March, June, and September next year, but it should be noted that the March cut requires better inflation data or worse employment data to support it.

Goldman Sachs expects that by March next year, inflation data is expected to improve, and the labor market will not deteriorate further. In addition to the three rate cuts in 2025, the Federal Reserve is also expected to cut rates twice in 2026 and once in 2027, ultimately reaching a rate of 3.125%. Goldman Sachs also pointed out:

Chairman Powell leaned dovishly at the press conference, mentioning four times that the Federal Reserve's policy remains "significantly restrictive," and disagreed with the view that the federal funds rate is close to neutral. However, other officials are more hawkish than expected, and since Trump's administration, they are increasingly likely to limit the Federal Reserve's rate-cutting space due to tariff risks and other factors.

Dovish Powell

Goldman Sachs stated that the recent Federal Open Market Committee (FOMC) meeting supported Goldman’s dovish expectations but also presented certain risks. Support came from Powell.

First, Powell clearly stated that he believes inflation will return to target, and the cooling of the labor market still needs attention.

Powell stated that the return of inflation to target "is still largely proceeding as planned," and he is "confident" about this. Powell also reiterated that the labor market is not the main source of inflationary pressure, that commodity inflation has normalized, and that housing may decline further as the catch-up effect dissipates. The recent rise in inflation mainly reflects the stock market's impact on the financial services category, which "does not truly reflect tensions in the economy."

Regarding the labor market, Powell mentioned at least ten times that the labor market has cooled or is gradually cooling, and he mentioned three times that the labor market is looser than in 2019. Powell reiterated that this is not a necessary condition for inflation to return to target, but the FOMC will continue to monitor this.

Second, Powell emphasized four times that the Federal Reserve's current monetary policy remains "significantly restrictive," indicating that he does not agree with the view recently expressed by some members that the federal funds rate is close to neutral.

Hawkish Other Federal Reserve Officials

As mentioned above, support comes from Powell, while risk factors come from other Federal Reserve officials.

First, some FOMC members have behaved more hawkish than Goldman expected. Recent comments have indicated that some members have a more hawkish view on the balance of inflation and employment risks. At last night's meeting, one member opposed the rate cut, and four members softly opposed it (the dot plot shows they expect next year's rates to be above 4.0%) Secondly, after Trump took office, the uncertainty of tariffs or the possibility of the U.S. imposing high tariffs may limit the Federal Reserve's room for interest rate cuts.

The FOMC may be concerned that tariffs will drive up inflation, and therefore, out of caution, the Federal Reserve may choose to slow down the pace of interest rate cuts. After all, Powell mentioned last night: "When the path is uncertain, you need to proceed more slowly."

However, Goldman Sachs also stated that the anticipated tariffs may not necessarily prevent interest rate cuts, as they would only provide a one-time boost to core PCE inflation, peaking at 30-40 basis points. Moreover, the impact of tariffs on interest rates is bidirectional; for example, the impact of tariffs in 2019 actually contributed to interest rate cuts