After a strong non-farm payroll report, Goldman Sachs "surrenders": no longer expects the Fed to cut interest rates this year.

Facing an labor market far exceeding expectations and resilient economic data, Goldman Sachs officially surrendered to the reality of "Higher for Longer". On June 6th, according to Wind Trading Terminal, in their latest research report, Goldman Sachs' Chief U.S. economist, David Mericle, completely abandoned the expectation of rate cuts this year and pushed back the timing of the last two rate cuts in their model to June and December of 2027. The report sent a clear signal: with the triple catalyst of tariffs, war-induced high oil prices, and AI demand, core PCE inflation in 2026 will remain above 3%, leaving the Federal Reserve with no urgency to cut rates in the short term. Furthermore, Goldman Sachs doubled the probability of a Fed rate hike to 20%. This means that the market must recalibrate its bets on an easing path, and short-term funds betting on rate cuts will face a severe test. With a strong labor market, the urgency of rate cuts has disappeared Goldman Sachs pointed out that in recent months, U.S. economic activity and labor market data have been stronger than expected, especially with a remarkable rebound in job growth. According to a report on Wall Street News, the U.S. added 172,000 non-farm jobs in May, nearly twice the market's expected 88,000, and significantly higher than April's 115,000. Based on this, Goldman Sachs revised its forecast for the U.S. unemployment rate from a previous decrease to 4.6% to now only a slight increase to 4.4%. This level of unemployment rate cannot create any "urgency" for the Federal Reserve to lower its federal funds rate. Therefore, Goldman Sachs made a significant adjustment to its benchmark forecast: pushing back the timing of the last two rate cuts from the original expectations of December 2026 and March 2027 to June and December 2027. Although Goldman Sachs still expects GDP growth in the second half of this year to be slightly below potential levels due to higher oil prices dragging down spending, this is not enough to change the Federal Reserve's determination to stay put. Three major inflation drivers, core PCE "breaking 3" within the year Why can't the Federal Reserve pull the trigger on rate cuts? Goldman Sachs pointed to three major inflation drivers: the transmission effects of tariffs, the impact of war-induced high oil prices, and the (incorrectly measured and overestimated) demand for artificial intelligence (AI). Goldman Sachs predicts that the combined impact of these three forces will remain relatively stable this year, leading to core PCE inflation running above 3% for the full year of 2026. For the FOMC, the most natural path is to postpone rate cuts until these effects dissipate and core PCE approaches the 2% target. However, from a fundamental perspective, the underlying drivers of inflation are still soft. Goldman Sachs estimates that the current wage growth rate is 0.5 percentage points lower than the level required to achieve the 2% inflation target, and leading indicators of rent growth are still very low. Therefore, unless there are additional supply shocks, Goldman Sachs expects inflation to fall back to around 2% by 2027. Rate hike probability doubled to 20%, but "stay put" becoming a reasonable alternative Although Goldman Sachs still believes that the likelihood of the Fed resuming rate hikes is low, this tail risk is significantly increasing. Goldman Sachs raised the probability of a rate hike from the previous 10% to 20%. Recent remarks from Federal Reserve officials have clearly turned hawkish, with several participants stating that a rate hike is possible if the inflation situation worsens. More importantly, the incredibly resilient economic and job data have essentially "lowered the threshold for rate hikes" - a strong economic base means that even if a rate hike ultimately proves to be a mistake, the cost and risk will be much smaller. However, Goldman Sachs also reassured the market by stating that there are no widespread signs of war-induced inflationary shocks spreading, and while the University of Michigan's long-term inflation expectation has jumped to 3.9%, Goldman Sachs' ongoing comprehensive inflation risk indicator remains at a low level. In terms of terminal rates, Goldman Sachs has maintained its forecast of 3-3.25%. This is mainly because the FOMC's long-term dot plot has remained stable over the past year, and most members still believe that current policies are slightly restrictive and envision further normalization after inflation declines. However, Goldman Sachs warned that a longer pause on rate cuts would give the Federal Reserve more time to be convinced by robust economic performance that the current federal funds rate is already in a "suitable position". Furthermore, the view that stronger investment demand brought by AI requires matching higher rates may gain more recognition. Therefore, Goldman Sachs believes that a "flat path" of unchanged rates is a very reasonable alternative. In the latest scenario probability forecast, Goldman Sachs provides a clear distribution: Rate hike: probability increased to 20% (from 10%) Flat path of unchanged rates: probability is 25% (unchanged) Base case (two rate cuts next year): probability reduced to 30% (from 40%) Economic recession and a substantial rate cut: probability is 25% (unchanged) It is worth noting that even though Goldman Sachs increased the probability of a rate hike and lowered the probability of rate cuts, their Fed rate forecast path, weighted by probability, is still significantly lower than current market pricing. This article is an excerpt from "Wall Street News", author: Dong Jing; GMTEight editor: He Yucheng.