Goldman Sachs has revised its forecast for U.S. interest rates in 2025, anticipating three quarter-point cuts. This adjustment is attributed to limited effects from tariffs and growing concerns over labor market weakness. The Wall Street firm projects that the Federal Reserve will implement rate cuts of 25 basis points each in September, October, and December, a change from its previous expectation of only a single cut of 25 basis points this year. In their analysis, Goldman Sachs noted, “We had previously thought that the peak summer tariff effects on monthly inflation and the recent large increases in some measures of household inflation expectations would make it overly awkward and controversial to cut sooner.”
However, early evidence indicates that the impacts of tariffs are less significant than initially anticipated, while disinflationary pressures have proven stronger than expected. Other financial institutions, such as Citigroup and Wells Fargo, share a similar outlook, predicting 75 basis points in rate cuts for 2025. UBS Global Research is slightly more aggressive, forecasting a reduction of 100 basis points. All four brokerages agree that the rate cuts will commence in September.
Consumer spending in the U.S. witnessed an unexpected decline in May, attributed to diminishing pre-emptive buying ahead of tariff announcements. Additionally, inflation rates only increased moderately during this period. Goldman Sachs foresees an additional two 25-basis point cuts in 2026, adjusting its “terminal rate” forecast to a range of 3.00% to 3.25%, down from a prior estimate of 3.50% to 3.75%. Currently, the Fed’s benchmark interest rate stands at 4.25% to 4.50%.
The jobs report set to be released for June may provide further insights into a potentially weakening labor market, which could strengthen the case for earlier rate reductions.