Goldman Sachs’ Chief US economist David Mericle expects the US Federal Reserve to hold off on rate cuts for longer, as it weighs sticky inflation against signs of a softening labour market.”We’ve pushed back our expectation of Fed cuts to September and December,” Mericle said. While inflation risks remain, he believes a modest cooling in jobs data could still give the Fed room to cut rates later this year.
These are edited excerpts of the interview.
Q: Do you think that there is a chance that the US winds down its involvement, but Israel continues the war, and therefore, the Strait of Hormuz remains a problem?A: In thinking about the economic implications, we’ve mostly thought about how long oil exports through the Gulf remain disrupted. In our base case, we expect the Strait to be disrupted for about six weeks in total, so still a few more weeks. The risks lean toward a longer disruption.We expect oil prices to rise further in March and April and then gradually come down over the course of the year. With risks tilted to the upside, oil price risks are also skewed higher, which would have larger consequences for inflation and growth in the US and globally.Also Read: Fed may still cut rates if labour market weakens despite oil shock: Citi
Q: Do you think that the domestic deterioration in the economy will be strong enough for President Trump to stop the war, to withdraw from the hostilities?A: It is hard to know what the White House is planning. In the US, as in many countries, gasoline prices are highly salient and carry significant political consequences. With midterm elections coming up, policymakers would be concerned about a sharp rise in gasoline prices ahead of the elections.Q: What are you expecting from the Fed? Do you think there will be inflation fears, or will growth worries be more, and the Fed may cut more than earlier anticipated?A: We’ve pushed back our expectation of Fed cuts to September and December. Even before the war and the spike in oil prices, Fed officials had differing views—some focused on labour market weakness, others preferred a longer pause until inflation moved closer to 2%. The war adds to both inflation and growth risks, making decisions more complex. We still expect a couple of rate cuts this year, as the labour market is likely to soften modestly and underlying inflation trends remain relatively benign, despite tariff and energy-related pressures.Also Read: Fed to stay cautious on rate cuts with inflation still in focus, says William LeeQ: So, your expectation is two rate cuts from the Fed in calendar 2026?A: Yes, we expect cuts in September and December. Even if inflation declines gradually and unemployment rises slightly to around 4.6%, there could be disagreement within the FOMC. However, these trends together make a reasonable case for cuts, with the Fed funds rate moving toward a more neutral level of around 3–3.25%.Q: Let me come to the 10-year yield. We saw it going beyond 4.4 and now trading above 4.3. The concern is not just inflation but also the US fiscal deficit. Do you think the deficit, which may have worsened due to the war, will keep yields high? What range are you looking at for the 10-year?A: The most immediate driver has been the market no longer expecting near-term rate cuts and even considering hikes. That repricing at the front end has spilt over into longer-term yields and may have gone too far. It is unlikely that the Fed is more likely to hike than cut. Fiscal deficit concerns are part of the broader picture, but not the primary recent driver. While long-term fiscal sustainability is an issue, markets tend to focus on it intermittently. War-related spending could bring renewed attention, but it has not been the main factor driving long-term yields recently.Catch all the latest updates from the stock market here
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