Goldman’s shift reinforces the rally at the short end of the Treasury curve, where 2-year yields posted their biggest one-day fall in more than a year on Thursday, and takes some support away from the US dollar. Oil is the main risk to the call: with Brent back above $100 on China’s fuel export halt and US troop deployments, a renewed energy-driven inflation pickup could quickly revive October hike pricing. Long-end yields remain near 2002 highs, so a softer Fed path may do more to steepen the curve than to ease broader financial conditions. Friday’s payrolls report is the immediate catalyst, with a strong print likely to push hike odds back up regardless of Goldman’s view.
—
One soft inflation print was enough for Goldman to push its next Fed hike to December and openly wonder whether the Fed’s tightening cycle has already peaked.
Summary:
- Goldman Sachs moved its forecast for the next 25 basis point Fed hike to December from October
- The bank said there is a strong chance the FOMC concludes further hikes are unnecessary
- August PCE inflation rose 3.4% y/y versus 3.7% expected; core PCE ran at about 3%
- Goldman also cited dovish remarks from New York Fed President John Williams
- Goldman forecasts Q4 core PCE at 3.0%, below the FOMC median of 3.4%
- CME FedWatch odds of an October hike fell below 40%, from about 70% a week earlier
Goldman Sachs has pushed back its forecast for the Federal Reserve’s next interest rate increase to December from October, and said there is a strong chance policymakers will ultimately decide that no further hikes are needed.
The bank had previously expected a quarter-point rise at the October meeting, which would have followed the Fed’s September increase, its first since 2023. It changed the call after US inflation data for August came in softer than expected and after New York Fed President John Williams made remarks it viewed as dovish.
The personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose 3.4% from a year earlier in August, below forecasts of 3.7%. Core PCE, which excludes food and energy, rose about 0.25% on the month, also below expectations, for an annual rate of around 3%. Goldman forecasts core PCE inflation of 3.0% on a fourth-quarter basis, below the 3.4% median projection of FOMC participants.
The bank also noted upward revisions to growth, with second-quarter GDP revised to 2.2% annualised and first-quarter growth to 2.5%, while trimming its third-quarter tracking estimate slightly to 3.3%. It raised concerns about Fed Chair Kevin Warsh’s communication approach, which favours giving markets less information about how the central bank is likely to react to incoming data.
Market pricing moved in the same direction. CME FedWatch data showed the probability of an October hike dropping below 40% after the inflation report, from around 50% beforehand and about 70% a week earlier.
Fed officials remain divided on how far tightening needs to go. Minneapolis Fed President Neel Kashkari said on Thursday he expects further increases will be needed to restrain the economy into 2027, though he is unsure whether the next move should come this month. Governor Lisa Cook, speaking alongside Williams, voiced concern that supply shocks have proved surprisingly persistent and that the AI investment boom is already adding to inflation pressure.
Those views sit against a backdrop of sharply higher bond yields, with the US 10-year yield touching its highest level since 2002 on Thursday, and oil prices driven higher by the Iran war.
The next test comes with Friday’s September payrolls report, which could shift the balance between an October move, a December hike and Goldman’s scenario in which the Fed holds off altogether.
This article was written by Eamonn Sheridan at investinglive.com.