The Great Statistical Fog
The Federal Reserve is currently flying blind. Following a punishing forty three day government shutdown that paralyzed the Bureau of Labor Statistics, the central bank finds itself navigating the most treacherous macro-economic waters since the 1970s without a reliable compass. While the market remains fixated on the hawkish posturing of Chair Jerome Powell during the late October press conference, a quiet but profound decoupling is occurring between the Eccles Building and the street. At the center of this storm stands Goldman Sachs, led by chief economist Jan Hatzius, issuing a contrarian decree that flies in the face of recent bond market volatility. They are betting on a December rate cut that many traders have recently abandoned.
The Hatzius Bet and the Labor Leak
Why would Goldman Sachs double down on a cut when the Fed is signaling a pause? The answer lies in the structural decay of the American labor market, a reality that official government data has failed to capture due to the recent funding lapse. Private sector indicators, including the latest ADP payroll figures, suggest that the economy added a meager sixty four thousand jobs in the previous cycle, a far cry from the robust numbers seen in early 2025. Goldman’s David Mericle argues that the weakness in the job market is genuine and not merely a byproduct of statistical noise. Per the Goldman Sachs Research briefing, the argument for a December easing remains intact because the Fed’s risk management strategy dictates a proactive stance against a hard landing.
Visualizing the Pivot: December Rate Cut Probabilities
The Tariff Trap and Sticky Services
The situation is further complicated by the implementation of the November 1st tariff wall. With effective rates on Chinese imports surging by over one hundred percent in certain categories, the specter of cost-push inflation has returned. This presents a classic dual mandate nightmare for the FOMC. If they cut rates to support the cooling labor market, they risk fueling a second wave of inflation driven by trade protectionism. According to recent analysis from Bloomberg, several Fed officials have expressed concern that core non housing services remain stubbornly high. These officials are advocating for a wait and see approach, potentially skipping the December meeting entirely to gauge the impact of the new trade regime.
The Dark Hole of October Data
Investors are currently operating in what some analysts call a dark hole. Because the Bureau of Labor Statistics was unable to collect data during the 43 day shutdown, the October CPI report was effectively canceled. This means the market will not have a clean month over month comparison when the November numbers are released in mid December. The absence of this data has created an information vacuum where narrative often triumphs over reality. Goldman Sachs appears to be filling this vacuum by focusing on the rise in college graduate unemployment, which has hit eight point five percent. This specific demographic represents over forty percent of the labor force and is often a leading indicator of broader consumer demand shifts.
The Credibility Gap
The Fed’s credibility is on the line. If they pause in December and the labor market subsequently falls off a cliff, they will be accused of being behind the curve once again. Conversely, if they cut and inflation reaccelerates due to the tariff pass through effects, they risk losing their grip on long term inflation expectations. The bond market has reflected this uncertainty with the 10-year Treasury yield oscillating wildly between four point zero and four point three percent over the last forty eight hours. Per Reuters market reports, traders are aggressively repricing the terminal rate, trying to guess where the Fed will eventually find its neutral footing in a high tariff world.
A Fractured Consensus
The minutes from the October meeting revealed a deeply divided committee. While some members were eager to continue the easing cycle to protect the labor market, others were vocal about the risks of another inflationary spike. This internal friction is precisely what makes the Goldman Sachs call so provocative. By predicting a cut, they are essentially betting that the dovish faction of the Fed, bolstered by the cooling job market, will eventually win the argument before the December 10th meeting. The technical mechanism for this shift involves the Fed’s focus on the real interest rate. As inflation cools toward two percent (net of one-time tariff shocks), a steady nominal rate actually becomes more restrictive. To keep policy neutral, the Fed must lower nominal rates simply to keep pace with falling inflation.
The Path Toward the Terminal Rate
We are witnessing the final act of the 2025 monetary cycle. The debate is no longer about whether the Fed will ease, but at what speed they will reach the terminal floor. Goldman Sachs expects the target range to settle between three point zero and three point twenty five percent by the middle of next year. This forecast assumes that the US economy will reaccelerate to a two point five percent growth rate as the initial shock of the trade wars subsides. However, for the next few weeks, all eyes remain on the silence of the data. The market is searching for a signal that may not arrive until the very moment the Fed takes the stage in December. Watch the December 18th Consumer Price Index release closely. It will be the first comprehensive look at the post shutdown economy and will likely determine if the Fed’s December move was a masterstroke of risk management or a catastrophic miscalculation. The primary data point for the 2026 horizon remains the March 18 meeting, where the FOMC will reveal its revised dot plot and the true long term impact of the current tariff regime on the terminal rate.
