The Fed Should And Will Cut In Dec; Goldman

Authored by Rikin Shah and Cosimo Codacci-Pisanelli, Goldman FICC,

THE FED SHOULD AND WILL CUT IN DEC... 

The ride into the December Fed meeting has been a bumpy one to say the least.

The comments from Williams last Friday were enough to suggest that the numbers are there on the committee to support a cut and pricing has drifted all the way back to 21bps.

With the Fed black out period now commencing at 85% probability of a cut priced, and the data calendar sparce before the meeting, we think a cut is locked in.

As we’ve said before, we think this is the right call.

The trend of the labour market remains weaker. While jobs growth at last week’s NFP report were stronger, the unemployment rate and continuing claims ticked higher.

At the same time lay off trackers are showing some worrying signs – challenger data, WARN notices and Q3 earnings calls have all risen over recent months.

GIR also illustrate the notable deterioration in the labour market made up of college educated workers – now 8.5% for the 20-24yo age cohort.

This is important, college graduates account for 55-60% of US labour income. Given the labour market trajectory it’s good risk management for the Fed to cut in December and reassess in January after, effectively, three additional payroll reports.

What the Fed do next year is tricky to call.

As we’ve outlined numerous times now, the growth outlook will be supported for a number of factors.

The most notable of which will be from the fiscal tail winds of the big beautiful bill landing, which should create high velocity money that comes back through the economy quickly and which leaves our growth forecasts in the 2-2.5% range.

This should be enough of a cyclical boost to help stabilise the labour market, the tricky part is the timing.

The risk skew around labour market prints at the start of next year is likely to the downside, particularly in the context of a lower breakeven rate of payroll gains. 

With the inflation profile likely to remain benign (the current underlying ex tariff run rate is near 2%), a dovish Fed chair (particularly with Hasset now the front runner) and the cross currents from AI (possibly lower inflation and employment), the scope for a front end led sell off seems more limited.

We’d expect terminal rate pricing to continue to hover around the 3% mark.

The trade for the better growth outlook in 2026 is likely going to be a short in the 10y part of the curve, but one to enter in Q1.

IN SUMMARY...

With December Fed pricing back above 80% as we head in to the blackout period and a light calendar before the meeting, we think a cut is as close to locked in.

Into next year the outlook is trickier, it will be a question of offsetting the softening labour market against incoming tailwinds to growth.

The timing of both of these cross currents might prove challenging, but we think a short in 10yrs will be the trade at some point in Q1 as the front end is likely to remain relatively well anchored.