Goldman Sachs Raises Recession Odds, Pushes Fed Cut Forecast to September

Goldman Sachs pushed back its forecast for the Federal Reserve's first rate cut from June to September on Wednesday, raising its year-end PCE inflation forecast to 2.9% and putting recession odds at 25% as the U.S.-Iran conflict drives oil prices higher and complicates the central bank's path toward easing.

The firm now expects two quarter-point reductions this year, one in September and one in December, after previously projecting the easing cycle would begin in June followed by a second cut in September. Goldman cited rising inflation risks tied directly to the Middle East conflict as the reason for the shift. Global financial markets have been under pressure as the U.S.-Iran war stoked fears of an oil supply shock, elevated inflation, and an uncertain economic outlook.

"By September, we expect both some further labour market softening and progress on underlying inflation to contribute to the case for a cut," Goldman said in a note Wednesday, adding that earlier cuts remain possible if the labour market weakens sooner and more substantially than expected.

The bank left explicit room for the Fed to move faster if economic conditions deteriorate. Goldman strategists said a weak February jobs report has kept alive concerns over further cooling in the labour market, and that slower GDP growth along with rising geopolitical risks could increase the likelihood of earlier action. The firm added that if the labour market weakens enough to warrant earlier cuts, concerns about higher oil prices feeding into inflation or inflation expectations are unlikely to prevent the Fed from easing sooner.

The revised inflation call reflects how sharply the geopolitical environment has shifted Goldman's near-term outlook. The firm also slashed its 2026 U.S. economic growth forecast alongside raising the PCE projection, with Goldman's research team now penciling in 25% recession odds over the next 12 months.

That marks a significant departure from the more optimistic posture Goldman held as recently as December. In a December 3, 2025 "Global Views" note, chief economist Jan Hatzius wrote that the much-delayed September jobs report showed signs of a cooling labor market and may have sealed a 25-basis-point cut at the next FOMC meeting. With the next jobs report scheduled for December 16 and the consumer price inflation print due December 18, Hatzius wrote at the time, "there is little on the calendar to derail a cut on December 10."

In that same December note, Goldman projected U.S. economic growth of 2 to 2.5% in 2026, driven by reduced tariff impact, tax cuts, and easier financial conditions. The firm's working assumption was that policymakers would slow the pace of easing in the first half of 2026 as growth reaccelerated and inflation cooled. Goldman estimated that underlying inflation had fallen to around 2%, with core PCE expected to recede once the tariff pass-through ended in mid-2026, provided there were no large second-round tariff effects and equity markets remained stable.

The labor market data underpinning those December assumptions was already mixed. Nonfarm payrolls grew by 119,000 in September, stronger than expected on the headline, but Goldman estimated the underlying job growth trend at just 39,000 as of that month. Alternative indicators showed renewed job losses in October, a detail Hatzius flagged as a risk skewing toward more easing rather than less.

Fed Governor Chris Waller has also weighed in, suggesting the Fed should cut at the upcoming FOMC meeting given that the labor market remains weak. Waller has also indicated he expects the inflation shock from the Iran war to be short-lived, a view that aligns with Goldman's conditional framing that labor market conditions, not oil prices, would ultimately drive the timing of any Fed pivot.