Goldman Sachs' interest rate prediction hinges on oil prices

Goldman Sachs anticipates a single additional interest rate hike from the Federal Reserve in October 2026, followed by potential cessation of rate hikes for the current cycle. However, for the two-and-done strategy to work, a consistent decline in oil prices is crucial to temper inflation, according to Goldman's assessment ahead of a meeting expected to be hawkish.

The firm forecasts Brent crude oil prices to fall to $85 per barrel by December. Jan Hatzius, Goldman Sachs' chief economist, noted in a recent report that the Fed has rarely skipped meetings before elections, with the most notable instance being a 75 basis point hike just six days prior to the 2022 midterms. Beyond October, Goldman expects a stable federal funds rate as core PCE inflation declines faster than projected, and they anticipate rate cuts to their neutral rate estimate of 3.25-3.5% starting late in 2027.

The prediction surrounding oil prices appears to be accurate so far this week, as crude oil futures have seen a sharp, multi-day sell-off driven by easing geopolitical supply concerns and diplomatic dialogues between the US and Iran in the UN General Assembly. This shift in risk sentiment could signal a renaissance in the market, fueled by the release of Meta's free AI agents and Iran's potential opening of the Strait within a week.