Goldman Sachs Predicts Two More Fed Rate Cuts in 2025, Markets React Positively

Following the Federal Reserve's recent interest rate cut, markets are closely monitoring the potential for further easing. Goldman Sachs' economic analysis suggests the likelihood of additional rate cuts this year and into 2026, influencing market sentiment and expectations for future economic conditions.

The SPX is sensitive to changes in monetary policy, and the prospect of lower interest rates typically has a positive effect, as it reduces borrowing costs for companies and consumers alike. The initial reaction to the Fed's recent 25-basis-point cut saw major U.S. banks, including JPMorgan Chase and Citigroup, lowering their prime lending rates, which has a ripple effect on various consumer loans and the overall economy.

Goldman Sachs anticipates two more 25bps rate cuts this year, with the possibility of a more aggressive 50bps cut if the labor market shows signs of significant weakening. This outlook is based on recent economic data, including rising unemployment and indications of softening labor demand, as noted by Fed Chair Powell. The firm also projects two rate cuts in 2026, bringing the terminal rate to a range of 3.00%-3.25%, signaling a more dovish stance than currently priced into the market.

However, there are divergent views among financial institutions regarding the pace and magnitude of future rate cuts. Nomura now forecasts rate cuts at both the October and December meetings, while Morgan Stanley anticipates cuts at all three remaining Fed meetings this year, citing concerns over rising consumer prices. This divergence underscores the uncertainty surrounding the economic outlook and the challenges facing the Federal Reserve in balancing growth and inflation objectives.

Internal divisions within the Federal Reserve itself add another layer of complexity. While the median projection suggests an additional half-point in cuts by year-end, individual policymakers' expectations vary widely, with projections ranging from a policy rate of 2.9% to 4.4%. This lack of consensus highlights the difficulty in predicting the Fed's future actions and the potential for policy surprises.

Market sentiment has been significantly influenced by these developments. U.S. rate futures have increased the likelihood of another rate cut at the upcoming October meeting, reflecting growing expectations of continued monetary easing.

Declining job gains and a rise in unemployment to 4.3% have further fueled these expectations, as markets interpret these indicators as signs of economic weakness that warrant further policy intervention.

The Federal Reserve's decision-making reflects a cautious approach to monetary policy amid signs of economic softening. The divergence in projections among financial institutions and within the Fed itself highlights the complexity of the current economic landscape and the challenges in balancing growth and inflation objectives. All eyes will be on upcoming economic data releases and statements from Fed officials for further clues about the future direction of monetary policy and its potential impact on the SPX.

Expectations of further easing may continue to support the SPX, but the degree of future gains will likely hinge on the strength of economic data and the Fed's evolving assessment of the economic outlook.