Goldman Sachs expects Fed to skip October rate hike

Goldman Sachs anticipates the Federal Reserve will omit a rate increase at the October meeting but may raise rates again in December. The investment bank believes Fed participants have reached an agreement to increase the funds rate every other meeting. The Fed's shift to a more hawkish stance has led to a substantial rise in interest rates, resulting in moderate tightening since September.

However, the tightening is only slightly greater than what typically follows a single rate hike and significantly less than the four hikes currently anticipated by the market. Goldman Sachs is uncertain whether the FOMC will modify the language in its statement regarding the September hike. They might adopt language from Vice Chair Ms. Jefferson's recent speech, stating that further adjustments to the federal funds rate target range will depend on data trends, evolving outlooks, and risk balance.

Goldman Sachs does not anticipate any new information from the press conference. The strong support for hiking every other meeting suggests there is a high bar for deviating from this plan through the end of the year, which should limit the Fed communication's impact. If the FOMC maintains an every-other-meeting pace in 2027, they might consider hiking in March, provided they have five additional months of inflation data.

Goldman Sachs does not expect a March hike, as they believe inflation trends will improve by then, once the effects of tariffs, energy shock, and AI price pressures have diminished. A March hike is possible only if inflation numbers exceed Goldman Sachs' forecasts. The most significant risk is that oil futures remain above Goldman Sachs' forecasts, primarily due to concerns about potential further conflict with Iran.

Current market pricing of the Fed's path has eliminated one hike and now peaks at just over 4.5%. Goldman Sachs' baseline and probability-weighted Fed forecasts are less hawkish, both because they are skeptical about the FOMC hiking four times and because they expect rate cuts in the future.