Goldman Sachs has modified its forecast for Federal Reserve interest rate cuts, predicting they will start in June rather than July. This adjustment prepares for a potential economic downturn, with three 25 basis point cuts forecasted, lowering the federal funds rate to 3.5%–3.75% if no recession occurs.
In the event of a recession, the bank anticipates a more aggressive response, with rate cuts of around 200 basis points over the next year. The updated forecast now estimates total rate cuts of 130 basis points for 2025, an increase from the previous 105 basis points, aligning closely with recent market expectations.
Shifting Timing Of Rate Reductions
Goldman Sachs has shifted the timing of expected interest rate reductions, bringing forward the anticipated starting point from July to June. Their new position reflects growing caution around economic momentum, with concerns that output may slow quicker than previously assumed. The firm still envisions a soft landing, but they appear to be allowing more room for flexibility should the data sour more quickly. If the economy avoids outright contraction, they project a measured set of three 25 basis point cuts. Under that smoother path, the benchmark rate would fall into the 3.5%–3.75% bracket.
Should a downturn take root, however, a faster, heavier policy response is now on the table. The bank outlines a potential series of cuts totalling 200 basis points over twelve months in that instance. Meanwhile, estimates for easing in 2025 have also been revised upwards—to 130 basis points from their previous view of 105—moving closer to the pricing reflected in fed funds futures.
What this implies is more than just a calendar shift—it’s a recalibration of odds. The risk of forced acceleration in policy loosening now feels less remote. For those of us watching rate-sensitive pricing models, the guidance allows for a narrower window between action and reaction. It means less time to absorb macro indicators before implied volatility may shift again. The upward push in expected easing next year also suggests that policy accommodation could extend deeper than previously thought, even without a sharp contraction in GDP or labour markets.
Daily Rates Market And Inflation Data
We should be watching daily rates market responses to incoming inflation data far more carefully. Even modest surprises could now carry more weight in determining whether swaps pricing remains anchored to these updated forecasts. Powell has been consistent in keeping optionality open, but the forward curve is now clearly bending toward earlier policy action.
From a trading point of view, term structure is what’s getting redefined—but not across the entire curve all at once. The front-end in particular is more sensitive under this new forecast timing, and spreads between one and two-year tenors may widen if recession risk picks up further. Longer-dated volatility, meanwhile, has a narrower margin to tie in near-term rate cut odds with longer-term inflation assumptions. There’s a gap, and it’s getting harder to ignore.
For positioning, and for those managing convexity in the short to medium-tenor space, we believe there’s an opportunity to focus on instruments most responsive to 25 basis point shifts. The reaction function hasn’t changed so much as recalibrated, and that alone can impact hedging strategies. Given that projected easing now begins a month earlier, layering in trades that capitalise on this timing differential could prove beneficial over the coming weeks. Risk now resides not just in the magnitude, but in the sequencing. The calendar matters again.
