Goldman Sachs Asset Management expects the Federal Reserve to make two more cuts of 25 basis points each in 2023, likely in October and December. This assumes that inflation remains stable and the labor market does not rebound sharply. The firm believes that the Fed is currently focused on a gradual approach to easing. The recent dot plot reflects policymakers’ confidence in decreasing inflation and acknowledges rising risks to growth.

Factors That Could Change This Prediction

Goldman Sachs states that only major surprises in inflation or a fast recovery in the labor market could change this outlook and prevent further cuts. If no such surprises occur, the Federal Reserve plans to maintain a balanced strategy, controlling inflation while promoting economic growth. Their analysis suggests that the Federal Open Market Committee (FOMC) is now more cautious in its risk management approach. Most committee members are indicating a move toward less strict policies, suggesting that more rate cuts by the end of the year are likely. In 2026, Goldman Sachs anticipates the FOMC will implement two additional cuts, in line with the expectation of ongoing easing to support sustainable growth. Following the recent rate cut, it seems clear that two more quarter-point reductions will happen this year, probably in October and December. This steady approach from the Federal Reserve aims to guide the economy to a soft landing. Traders should expect a continued dovish policy unless significant economic data prompts a shift.

Current Market Conditions and Strategies

This outlook is backed by recent data, which showed that inflation in August dropped to an annual rate of 2.8%, along with a softer labor market, adding only 150,000 jobs. These data points give policymakers reason to continue easing financial conditions. After the aggressive rate hikes in 2022 and 2023, the current trend is moving toward loosening. For traders in interest rate derivatives, this suggests positioning for lower short-term rates, possibly using options on SOFR futures. The Fed’s gradual approach is likely to reduce volatility, making strategies that benefit from steady rate declines more attractive. Any significant rise in yields in the coming weeks could provide a selling opportunity. In the equity markets, a dovish Fed provides a boost, making call options or call spreads on major indices like the S&P 500 advantageous. This policy direction may also put pressure on the US dollar, leading to increased interest in put options on dollar indexes as the interest rate gap with other currencies narrows. The main risk to this outlook would be a sudden increase in inflation or unexpectedly strong employment data. Traders should closely monitor the upcoming CPI and non-farm payroll reports for signs of economic strength that might disrupt the plan for further cuts. Such surprises could lead to rapid changes in rates and increased market volatility. Looking ahead, the easing cycle is expected to continue into 2026 with two more cuts. This long-term view indicates that the current supportive policy environment is likely to last, reinforcing the notion that interest rates will trend downward for the foreseeable future. Create your live VT Markets account and start trading now.

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