TLDRs
- Goldman Sachs drops Fed cut forecast after strong U.S. jobs report reshapes expectations
- Wall Street splits widen as Citi still expects multiple rate cuts in 2026
- Strong employment data reduces pressure on Federal Reserve to ease monetary policy
- Markets reassess AI and tech rally as rate-cut optimism fades quickly
- Inflation and labor strength keep Fed policy outlook uncertain heading into 2026
The change comes after a stronger-than-expected U.S. labor market report, which signaled continued resilience in hiring and reduced urgency for monetary easing.
According to the latest data from the U.S. Labor Department, the economy added 172,000 jobs in May, while unemployment remained steady at 4.3%. The figures suggest that the labor market remains tighter than previously anticipated, reinforcing the idea that the Federal Reserve may keep policy restrictive for longer.
For Goldman Sachs, the implications are clear: rate cuts are no longer part of the base case for this year. Instead, the bank is aligning with a growing segment of Wall Street that now expects the Fed to prioritize inflation control over policy loosening.
The Goldman Sachs Group, Inc., GS
Wall Street Divides Deepen
The recalibration has widened a growing split among major financial institutions. While Goldman Sachs has turned more cautious, Citigroup continues to hold a contrarian view, forecasting three separate 25-basis-point rate cuts across September, October, and December 2026.
Citigroup economists argue that the labor market, while stable, could weaken in the coming months, opening the door for monetary easing later in the year. However, this stance is increasingly viewed as an outlier as other major banks, including Bank of America, have already removed rate cuts from their forecasts.
This divergence highlights the uncertainty facing markets as investors attempt to balance persistent inflation risks against signs of slowing economic momentum in select sectors.
Fed Policy Under Scrutiny
Attention is now turning toward the Federal Reserve’s upcoming policy meetings, particularly the June 16–17 session, which will be the first under newly appointed Chair Kevin Warsh. The stronger-than-expected jobs report has eased immediate concerns about labor market deterioration, allowing policymakers to focus more heavily on inflation dynamics.
Several Fed officials have recently signaled a cautious stance. Cleveland Fed President Beth Hammack described the economy as operating near full employment while warning that inflation remains elevated. Meanwhile, Fed Governor Christopher Waller has not ruled out additional rate hikes if price pressures fail to cool.
These comments reinforce the idea that the Fed’s next move is far from settled, with both cuts and hikes still on the table depending on incoming data.
Markets Face Policy Uncertainty
Financial markets have reacted sharply to shifting expectations. Equity indices, particularly technology-heavy benchmarks, experienced notable volatility following the jobs release, with investors reassessing the likelihood of policy support.
The Nasdaq dropped over 4% in a single session, while semiconductor stocks recorded one of their steepest declines since the pandemic-era shock in 2020. Traders, who had previously priced in easier monetary conditions, are now reassessing risk across high-growth sectors that depend heavily on low borrowing costs.
Market strategists note that much of the recent rally in AI-linked equities was built on assumptions of future rate cuts. With Goldman Sachs now removing that assumption, investors are recalibrating valuations and reassessing whether current price levels can be sustained without monetary easing.
Inflation Keeps Pressure On Fed
Inflation remains the central constraint shaping Fed policy. Despite progress toward stabilization, price pressures have proven sticky, particularly due to energy costs, tariff effects, and wage dynamics.
The International Monetary Fund recently pushed back its timeline for inflation returning to the Fed’s 2% target, now expecting it by 2027. Officials have warned that upside risks remain, leaving policymakers cautious about loosening financial conditions too early.
For Goldman Sachs, this combination of resilient employment and persistent inflation makes a strong case for maintaining higher rates for longer. While the outlook could still shift if labor data weakens significantly, the current trajectory suggests limited room for policy easing in 2026.
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