Goldman Sachs has formally retracted its previous forecast for Federal Reserve interest rate cuts in 2026. The investment bank had anticipated cuts in December 2026 and March 2027, but has now completely erased these projections from its timeline. The revised message from the firm is unequivocal: no rate cuts are expected this year, and the probability of the Fed's next move being no cut at all has risen significantly.
Goldman Sachs chief US economist David Mericle, in a new report, eliminated the bank's prior calls for two 2026 rate cuts. In their place, he now forecasts a single 25-basis-point reduction in June 2027 and another in December 2027. The catalyst for this major shift was the May employment report, which showed the US economy added 172,000 non-farm payrolls—far exceeding the 80,000 to 85,000 jobs economists had predicted. The unemployment rate held steady at 4.3% for a third consecutive month. Goldman concluded this data gives the Fed no justification to ease monetary policy in the near term.
A New Policy Outlook
Mericle did not merely delay the expected timing of cuts. Goldman Sachs also doubled its probability forecast for a small rate *increase* from 10% to 20%. While the bank does not consider a hike its "baseline scenario," this adjustment signals that the potential distribution of Fed policy outcomes is skewing in a more hawkish direction.
Prerequisites for Policy Easing
The report also outlined a specific set of conditions that must be met before the Fed is expected to act. Mericle stated that rate cuts would likely be postponed until four factors align: a reduction in trade tariff-related disruptions, a subsiding of oil price pressures stemming from conflict with Iran, a normalization of what Goldman views as "exaggerated AI demand," and a drop in year-over-year core PCE inflation closer to the 2% target.
Limited Confidence in the Forecast
Goldman Sachs itself expresses limited conviction in its revised outlook. The bank assigns only a 30% probability to its new "two cuts in 2027" baseline scenario, down from 40% for its previous forecast. The remaining 70% probability encompasses a range of outcomes from no cuts at all to a small rate hike.
Regarding the risk of a hike, Mericle wrote, "Resilient activity and jobs data have also lowered the bar for hikes. This is not because the data suggest overheating, but because a stronger starting point for the economy reduces the risk that a hike would ultimately prove a 'costly mistake.'"
Market Implications and Reactions
The stark divergence between the actual 172,000 jobs added in May and economist forecasts suggests the Fed's restrictive policy is having a smaller impact on the labor market than models predicted, directly undermining the case for policy easing. Since cutting borrowing costs by 75 basis points by the end of 2025, the Fed has held its benchmark rate in a 3.50% to 3.75% range. The May jobs data indicates this level of restriction is not cooling the labor market in the way the Fed typically desires before cutting.
Goldman Sachs is not alone in this interpretation. Nomura had already forecast the Fed would hold rates steady throughout 2026. Bond market moves have aligned with Goldman's report: following the jobs data, investors began pricing in a small chance of a 25-basis-point hike by December, and the Nasdaq 100 index fell 5% on the day the report was released.
Key Takeaways from the Revision
The forecast shift represents a full six-month delay from the previous timeline. Goldman's baseline prediction of two 2027 cuts now carries only 30% confidence—barely better than a coin toss. The four specific conditions for cuts are currently unmet. The 5% sell-off in the Nasdaq 100 reflects how previously embedded rate-cut expectations were propping up stock valuations, particularly for growth and tech shares.
Looking Ahead
The revised forecast implies the Fed's current rate level will be maintained for at least another 18 months, which would be the longest period of stable rates since the post-pandemic hiking cycle began. The direct implication for markets is that the high-rate environment many investors considered temporary is now expected to persist into 2027.
For equity investors, this means tech and growth stocks must wait longer for the valuation support that lower rates would provide. For fixed-income investors, the report strengthens the case for favoring shorter-duration assets, as longer-dated bonds are more sensitive to rate expectations. The 20% probability of a hike erodes the supportive factors for long-term Treasuries, a dynamic already reflected in rising 10-year Treasury yields.
A deeper question raised by the report is whether May's jobs report was a one-off anomaly or a signal that the US economy's resilience to monetary tightening is more persistent than Goldman's previous models assumed. If June and July also produce similarly robust data, Goldman's 2027 rate-cut timetable may require another revision. Mericle's report acknowledges this possibility, which is precisely why the bank assigns such low confidence to its own baseline forecast.
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