Powell's press conference: The "most important message" is not interest rate cuts or balance sheet expansion, but rather "systematic overestimation of employment," with the Federal Reserve expecting "negative job growth."

At the recently concluded December FOMC meeting, the Federal Reserve cut interest rates and expanded its balance sheet: it lowered rates by 25 basis points as expected and announced in advance the plan for "reserve management bond purchases," with the first round purchasing about $40 billion in short-term government bonds.

However, according to Goldman Sachs, what shocked the market was not the adjustment of monetary policy itself, but Federal Reserve Chairman Jerome Powell's admission that the official employment growth data may have "serious systematic overestimations," and the actual situation may even have fallen into negative growth.

Goldman Sachs bluntly stated that this was "the most important new information" from the meeting.

This means that the key pillar supporting the U.S. economy—the labor market—is far weaker than it appears on the surface. This finding not only explains part of the reason why the Federal Reserve insisted on cutting rates while inflation remains above target, but more importantly, it opens up the possibility for further monetary easing policies in the future, which may lead to a more dovish policy path than the market previously expected.

The "Illusion" of Employment Data: From a Monthly Increase of 40,000 to a Monthly Decrease of 20,000

According to Goldman Sachs' analysis, although the December interest rate meeting appeared calm on the surface—the Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by 25 basis points to 3.5%-3.75%—this is not the full story.

The bank's chief economist, David Mericle, stated in a report: "The most important new information today is that Chairman Powell and the Federal Reserve staff estimate that the currently published employment growth data (i.e., non-farm payroll data) is overstated by 60,000 jobs per month."

This officially acknowledged margin of error is astonishing, as it is far higher than Goldman Sachs' own previous estimate of an overstatement of 30,000 to 35,000 jobs per month.

Powell further explained the significant impact of this revision. Official data shows that from May to September 2025, the average monthly increase in employment in the U.S. was about 40,000 people. However, if we deduct the 60,000 overstatement, the real employment growth would turn into a monthly -20,000 people.

Powell: Need to "Carefully Monitor" Employment Negative Growth

Faced with such weak data, Powell issued a rare stern warning at the press conference. Powell stated:

"In a world where job creation is negative, I think we need to very carefully observe this situation and ensure that our policies do not suppress job creation."

He continued at the press conference: "We believe these numbers are overstated."

This concern provides partial support for the Federal Reserve's third consecutive rate cut. Goldman Sachs believes that it is this extremely pessimistic judgment about the labor market that has become the core undercurrent of this meeting.

Why is Employment Data "Systematically Overestimated"?

Why is there such a huge deviation? The core issue lies in the "Birth-Death Model" used by the U.S. Bureau of Labor Statistics (BLS) when calculating non-farm dataAccording to The Wall Street Journal, this model is designed to estimate the number of jobs created by new businesses and the number of jobs lost due to business closures.

Since it is difficult for the U.S. government to accurately and in real-time survey all newly established or closed companies, it can only rely on this statistical model to make "guesses." This model can operate during periods of economic stability, but at turning points in the economy, it often systematically overestimates job growth due to inertia.

Powell referred to this bias as "systematic overcount."

At the press conference, Powell acknowledged, "We can say that the labor market is not only cooling down, but the speed of cooling is faster than we expected." He pointed out that this overestimation of data has created a "systematic overstatement" due to the lag of the statistical model.

In fact, this is not the first time this data has undergone significant revision. The preliminary benchmark estimate released by the U.S. Bureau of Labor Statistics in September showed that job growth was overestimated by 911,000 people for the year ending in March 2025. The final revised data is expected to be released in February next year.

Hawkish Dot Plot vs. Dovish Powell, the Fed's balance is tilting towards "job preservation"

For the market, on one hand, the Federal Reserve has released clear "hawkish" signals:

1. Revised statement wording: The FOMC hinted in its statement that the threshold for further rate cuts has been raised.

2. Increased internal divisions: The dot plot showed that two voting members cast hawkish dissenting votes, and six participants wrote "soft dissent" opinions (leaning towards not cutting rates) in the 2025 dot plot. This level of internal division has reached a recent high.

However, the market's reaction has leaned towards dovish (i.e., believing that policies will be more accommodative). Goldman Sachs analysis pointed out that this is entirely due to Powell's acknowledgment of "negative non-farm employment growth" at the press conference, as well as his continued confidence in the inflation outlook, which countered the hawkish policy statement.

When the Fed Chair began discussing the possibility of "negative employment growth," the market realized that even if inflation has not fully returned to 2%, the Fed would still have to continue easing to preserve jobs. As CNBC reported: "In the Fed's battle against inflation and unemployment, the winner on Wednesday was the 'unemployment' side."

This means that the Fed's balance is tilting towards "job preservation."

Economists: "The likelihood of a rate cut again in January is high"

Christopher Hodge, an economist at Natixis, pointed out in a report that the most influential members of the Fed are closely monitoring the unemployment rate. He predicted, "Because we see the unemployment rate continuing to rise in the first quarter of 2026, we believe the Fed will continue to cut rates to prevent further softening of the labor market."

Hodge believes that as long as labor demand weakens and the unemployment rate rises, the path for further rate cuts has been cleared, even in the face of strong hawkish opposition. He even stated, "The likelihood of a rate cut again in January is high."The stock market rebound on Wednesday and Thursday indicates that investors believe the FOMC's remarks are not as hawkish as feared. The pricing in the futures market is more straightforward: according to CME Group's FedWatch tool, while traders expect the next rate cut may not come until April, they are betting on two rate cuts throughout 2026, which is more aggressive than the one suggested by the Fed's dot plot, with even a 41% probability of three rate cuts.

Goldman Sachs Outlook: Rate Cuts Not Over, Balance Sheet Expansion First

Based on the above significant information, Goldman Sachs maintains its forecast for the Fed's subsequent path in its research report.

• Rate Path: Goldman Sachs expects the FOMC to carry out two normalization rate cuts in March and June 2026, ultimately maintaining the rate in the range of 3%-3.25%. Although the dot plot shows significant divergence among committee members regarding the terminal rate (ranging from 2.5% to 4%), Goldman Sachs believes the core PCE inflation rate will drop to 2.2% by the fourth quarter of 2025, which will support further rate cut rationale.

• Early Balance Sheet Expansion: Another important detail that the market has overlooked is that the FOMC announced it will begin purchasing government bonds this Friday (December 12). This action is a few weeks earlier than Goldman Sachs had anticipated. The aim is to ensure that the banking system's reserves remain ample amid fluctuations in the Fed's other liabilities