Goldman Sachs has pushed back its forecast for the Federal Reserve's next interest rate increase to December from October, and now sees a strong chance the central bank decides no further hikes are needed at all. The shift followed softer August inflation data and dovish remarks from a top Fed official, pulling support from the dollar and fueling a rally in short-dated Treasuries.
Goldman shifts its Fed call
Goldman Sachs now expects the Federal Reserve's next quarter-point rate hike in December rather than October, and says there is a strong chance policymakers ultimately conclude no further hikes are needed. The bank had previously expected an October increase following the Fed's September hike, its first since 2023.
Goldman changed its call after US inflation data for August came in softer than expected and after New York Fed President John Williams made remarks the bank viewed as dovish. The personal consumption expenditures price index 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 for an annual rate of around 3%, also below expectations.
Goldman forecasts fourth-quarter core inflation at 3%, below the Federal Open Market Committee's own median projection of 3.4%. The bank also pointed to upward revisions in growth, with second-quarter GDP revised to a 2.2% annualized pace and first-quarter growth to 2.5%, even as it trimmed its third-quarter tracking estimate to 3.3%.
Dollar loses support as traders reprice odds
Markets moved in the same direction. CME FedWatch data showed the probability of an October hike dropping below 40% after the inflation report, down from about 50% beforehand and roughly 70% a week earlier. The repricing reinforced a rally at the short end of the Treasury curve, where two-year yields posted their biggest one-day fall in more than a year on Thursday, taking some support away from the dollar.
Fed officials remain split on how far tightening needs to go. Minneapolis Fed President Neel Kashkari still 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 persistent and that the AI investment boom is already adding to inflation pressure.
Oil remains the main risk to Goldman's softer call: Brent has moved back above $100 on China's fuel export halt and US troop deployments, and a renewed energy-driven inflation pickup could quickly revive October hike pricing. Friday's September payrolls report is the next catalyst, with a strong print likely to push hike odds back up regardless of Goldman's view.
Source: InvestingLive
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