This implies that underlying inflation has fallen to around 2%, Hatzius writes, and actual core PCE inflation should recede once the tariff pass-through ends in mid-2026. That’s assuming that there are no large second-round effects from tariffs—of which there are no signs—and that equity markets are stable.
Is the US job market weakening?
The chances of the fed funds rate falling further than Goldman Sachs Research’s forecast look more significant than the risk from rising inflation. Although nonfarm payrolls grew by a stronger-than-expected 119,000 in September, Goldman Sachs Research estimates that the underlying job growth trend is only 39,000 (as of September). Alternative indicators show renewed job losses in October.
And while initial jobless claims are low, other components of Goldman Sachs Research’s layoff tracker have risen notably in recent months. “This could mean that the weakness in the labor market is becoming too entrenched to be checked by a modest cyclical growth acceleration,” Hatzius writes.
The weakening in the job market for college-educated workers is particularly notable, he writes. As of September, the unemployment rate for college graduates aged 25 or older stood at 2.8%. While this may not sound too serious, it’s about 50% higher than its 2022 low. Meanwhile, the unemployment rate for college graduates aged 20-24 has climbed to 8.5%—up 70% from its 2022 low.
College graduates account for more than 40% of the US labor force and an estimated 55-60% of US labor income. “A further deterioration in employment opportunities for this key demographic—perhaps reflecting artificial intelligence (AI) and other efficiency-enhancing measures—could have a disproportionate negative impact on consumer spending and prompt further rate cuts over time,” Hatzius writes.
