The labor market needs the first US rate cut to happen in March, Goldman says

"The labor market is such a tricky one. [Before a downturn] it always looks like it's not too bad, and then it goes south quickly," Esther George said.

• The Federal Reserve should cut interest rates in March because of downside risks in the labor market, according to Goldman Sachs.
• Goldman economist David Mericle said inflation has already dropped to the Fed's inflation target, giving them flexibility in cutting rates.
• "There are some modest downside risks to inflation and the labor market that could still provide additional reasons for the FOMC to cut sooner rather than later."

The Federal Reserve should cut interest rates in March because there are downside risks to the labor market, according to Goldman Sachs economist David Mericle.

The market had largely expected the Fed to launch its first interest rate cut since 2019 at its March FOMC meeting, but those expectations have since been tempered due to stronger than expected economic data, including a hot fourth-quarter GDP print of 3.3%.

Current expectations suggest a 49% chance the Fed cuts rates in March, according to the CME FedWatch Tool, representing a sharp decline from the higher than 80% chance of a Fed rate cut just a few weeks ago. 

But Mericle isn't changing his view of a Fed rate cut in March and a total of five interest rate cuts from the Fed in 2024 because the labor market, while strong now, can sour on a dime. That, combined with inflation that has largely fallen to the Fed's long-term target, suggest that interest rate cuts are imminent.

"There are some modest downside risks to inflation and the labor market that could still provide additional reasons for the FOMC to cut sooner rather than later," Mericle said in a weekend note.

And the Fed should signal at its FOMC meeting later this week that a rate cut is on the table for March because there is a lot of economic data between now and then, and ultimately the Fed likes to keep its options open.

"Chair Powell could then respond to questions about a March cut by simply pointing out that there are still two rounds of inflation data and annual revisions to the CPI yet to come," Mericle said.

While the labor market remains as strong today as it did before the pandemic, Mericle observed, there are growing risks to further job losses as headlines of corporate layoffs have picked up steam in recent weeks. 

"Risks to the labor market are modest but not non-existent, and Fed officials might therefore conclude that if they're going to cut eventually, they might as well cut sooner rather than later," Mericle explained.

Mericle isn't the only economist keeping a close eye on the jobs market. Former Fed President Esther George noted just how quickly the labor market can sour, even when all indicators look positive.

"The labor market is such a tricky one. [Before a downturn] it always looks like it's not too bad, and then it goes south quickly," George told The Wall Street Journal.