Latest reports indicate that New York Fed President Williams stated that inflation needs to be brought back to the target level in a timely manner, and another rate hike before the end of this year would be reasonable. Currently, the market widely expects the Federal Reserve to continue raising rates this year, with the probability of a rate hike in October already approaching 70%.
However, regarding next year, several major Wall Street firms have sounded dovish. Goldman Sachs' latest research report indicates that the Federal Reserve will raise interest rates one more time at its October 27 meeting, after which rate hikes in this cycle are likely to come to an end.
Pantheon Macroeconomics also expects that, after potentially further tightening this year, the Federal Reserve will ease monetary policy next year, lowering the federal funds rate from its current target range of 3.75%–4.00% to 3.125% by year-end.
Earlier, Preston Caldwell, a senior U.S. economist at Morningstar, also projected that the Federal Reserve will cut interest rates twice in the second half of 2027 and an additional four times in 2028, bringing the federal funds rate down to a target range of 2.50%–2.75% by the end of 2028.
Will the Federal Reserve cut interest rates multiple times next year?
Goldman Sachs Chief Economist Jan Hatzius wrote in his latest report: "Throughout the modern history of the Federal Open Market Committee (FOMC), there have been very few precedents of skipping a rate hike on the eve of a presidential election. Most notably, the FOMC raised rates by 75 basis points just six days before the 2022 midterm elections. After October, as core PCE inflation has declined more rapidly than the committee had anticipated, we expect the federal funds rate to remain steady and still project rate cuts beginning at the end of 2027, bringing the rate down to our estimate of the neutral rate of 3.25% to 3.5%."
Goldman Sachs predicts that Brent crude will fall to $85 per barrel by December. At least for this week, that outlook appears to be correct. Over the past few days, crude oil futures have been subject to consecutive sharp sell-offs, as market concerns about supply disruptions stemming from geopolitical tensions have eased slightly. Brent crude has plunged nearly 13% from its recent peak of $113 per barrel, slipping back below the key psychological threshold of $100 and trading around $98.44.
This sharp drop in oil prices was triggered by Saudi Arabia's partial resumption of operations on its east–west pipeline. Meanwhile, diplomatic talks between the United States and Iran at the United Nations further weighed on oil prices. Consequently, the geopolitical risk premium that had previously pushed oil prices to a year-to-date high has also begun to ease.
Ben Emmons, founder of FedWatch Advisors, said: "Two forces have suddenly converged, and market risk appetite is rebounding. Meta's launch of a free AI assistant, coupled with signals from Iran's Islamic Revolutionary Guard Corps that the Strait of Hormuz could resume navigation within seven days, have acted like jumper cables, injecting fresh momentum into a previously sluggish market."
Pantheon Macroeconomics says that, following what could be further policy tightening by the Federal Reserve this year, monetary policy will ease next year—driven not by monetary indicators but by more encouraging inflation data and a weakening labor market.
Panshen Macro notes that the latest developments in the U.S. labor market further underscore the need to ease monetary policy. Preliminary estimates indicate that job gains have slowed to around 75,000 per month, with revised figures potentially closer to 25,000. Meanwhile, the drag of artificial intelligence on labor demand is becoming increasingly apparent, particularly in sectors with high AI adoption, such as information technology, finance, and professional services. The firm also points out that historical data suggest the Federal Reserve's policy shifts tend to be swift: over the past four decades, the average interval between the final rate hike of a tightening cycle and the first rate cut has been just six months.
Pansun's macroeconomic forecast projects that the Federal Open Market Committee (FOMC) will shift to substantial monetary easing next year, lowering the federal funds rate from its current target range of 3.75%–4.00% to 3.125% by year-end.
Recently, Preston Caldwell, a senior U.S. economist at Morningstar, also projected that progress in core inflation and weakening growth will prompt the Federal Reserve to cut interest rates twice in the second half of 2027. Furthermore, he expects the Fed to implement four additional rate cuts in 2028, as the unemployment rate is forecast to average 4.7% that year—higher than the Fed's 4.1% projection. Overall, this would bring the federal funds rate down to 2.50%–2.75% by the end of 2028.
Preston Caldwell notes that AI is currently boosting aggregate demand, putting upward pressure on interest rates. This effect stems from massive investment spending and the wealth effect on consumers driven by sharp gains in stock prices. However, for these investments and stock prices to remain sustainable, large-scale layoffs will almost certainly be required at some point. Such layoffs have yet to materialize, but if they do, they would dampen aggregate demand. Alternatively, if layoffs fail to occur, AI-related spending would contract due to a lack of returns on investment. In either scenario, the upward pressure that AI exerts on interest rates would largely dissipate.
Hassett Criticizes Fed Officials Who Advocate Raising Interest Rates
According to Bloomberg, on Wednesday local time, a senior White House official publicly questioned the necessity of the Federal Reserve's recent interest-rate hikes and criticized some Fed policymakers for advocating further monetary tightening even as inflation has already moderated. This once again underscores the divergence between the White House and certain Fed officials over interest-rate policy.
Kevin Hassett, director of the White House National Economic Council, said at an event at Georgetown University that the recent annualized core inflation rate stands at around 2 percent. He expressed confusion as to why the Federal Reserve is still raising interest rates, asking rhetorically, "Why are they still hiking?" He also noted that Fed Chair Jerome Powell is currently leading a Federal Reserve that has become "exceptionally partisan."
Last week, the Federal Reserve raised its benchmark interest rate by 25 basis points to a range of 3.75%–4.00%, marking the first rate hike since 2023. Hassett said that, based on his assessment of current economic data, he is concerned about the rationale behind the Fed's decision.
He also turned his criticism toward former Federal Reserve Chairman Powell and Federal Reserve Governor and former Vice Chair for Supervision Barr. Hassett pointed out that, according to historical practice, the Fed chair and vice chair typically leave the central bank after their terms end, but this norm has not been followed recently.
In addition, Hassett also expressed dissatisfaction with Federal Reserve officials who were not appointed by Trump. He said, "The market is also concerned because, over the past few days, many officials who were not appointed by President Trump have been speaking, stating that we still need to raise interest rates significantly." He then added that the Federal Reserve still has much work to do in "restoring its independence," calling this one of Chairman Powell's current priorities.
Editor/Jeffy