At the December FOMC meeting, the Federal Reserve delivered a dual surprise: a widely anticipated 25-basis-point rate cut and an early announcement of a $40 billion short-term Treasury purchase plan under its reserve management operations.

However, Goldman Sachs argues that the market-shaking revelation wasn’t the policy adjustments themselves, but Fed Chair Jerome Powell’s admission that official jobs growth data may suffer from "severe systemic overestimation"—with actual employment potentially already in negative growth. The bank called this "the most important new information" from the meeting.

This implies the U.S. labor market—a key pillar of economic strength—is far weaker than surface data suggests. The discovery not only partially explains the Fed’s rate-cut decision despite above-target inflation but, more crucially, opens the door to additional monetary easing, potentially signaling a more dovish path than markets expected.

**The Jobs Mirage: From +40K to -20K Monthly** While the FOMC’s 25bp cut to 3.5%-3.75% appeared routine, Goldman’s chief economist David Mericle highlighted Powell’s bombshell: The Fed now estimates nonfarm payrolls have been overstated by 60,000 jobs monthly—far exceeding Goldman’s prior estimate of 30,000-35,000.

Powell underscored the implications: Official data showed average monthly job gains of 40,000 from May to September 2025. After adjusting for the overcount, however, true employment growth would flip to -20,000.

**Powell’s Warning: ‘Careful Attention’ Needed for Negative Job Growth** In unusually stark terms, Powell cautioned: *"In a world where job creation is negative, we need to watch this very carefully and ensure our policies aren’t suppressing employment."* He added, *"We believe these numbers are overstated."*

Goldman views this labor market pessimism as the meeting’s undercurrent, justifying the Fed’s third consecutive cut.

**Why ‘Systemic Overestimation’?** The distortion stems from the Bureau of Labor Statistics’ (BLS) "Birth-Death Model," which estimates jobs added by new businesses and lost by closures. This model—reliant on statistical assumptions rather than real-time data—tends to lag during economic turning points, creating what Powell called a *"systematic overcount."*

The BLS had already flagged a 911,000 overestimation for the year ending March 2025 in a September preliminary revision, with final figures due in February 2026.

**Hawkish Dots vs. Dovish Powell: Fed Tilts Toward ‘Jobs First’** Despite ostensibly hawkish signals—a higher bar for future cuts in the statement and two dissenting votes—markets leaned dovish. Powell’s admission of potential negative job growth and sustained confidence in disinflation overshadowed the FOMC’s tough talk.

As CNBC noted: *"In the Fed’s battle against inflation and unemployment, Wednesday’s winner was unemployment."*

**Economists: January Cut Likely** Natixis’ Christopher Hodge predicts the Fed will keep cutting as unemployment rises, stating: *"A January rate cut is highly probable."* Futures markets price in two 2026 cuts (with 41% odds of three), exceeding the Fed’s dot-plot projection of one.

**Goldman’s Outlook: More Cuts, Earlier QE** The bank expects: - *Two 2026 cuts* (March and June), landing rates at 3%-3.25%, supported by core PCE inflation falling to 2.2% in Q4 2025. - *Earlier balance-sheet expansion*, with Treasury purchases starting December 12 to maintain ample reserves.