Goldman Sachs Projects 25 Bp Fed Rate Hike Followed by Policy Pause

Goldman Sachs expects the Federal Reserve to raise its benchmark interest rate by 25 basis points at its upcoming meeting on September 16, according to a new analyst note. The firm added the hike to its forecast following the August Consumer Price Index (CPI) report, citing high market pricing as a key factor for the expected move.

Hike Priced In, Fed Expected to Act

According to Goldman Sachs, the decision to forecast a rate increase was driven less by a change in their inflation outlook and more by market dynamics. With market-implied odds for a hike reaching 90%, the firm believes the Federal Open Market Committee (FOMC) will likely proceed with the increase to avoid a negative market reaction that could result from holding rates steady against strong expectations.

Recent inflation data showed that core CPI rose 0.29% in August, or 2.45% over the past year. Goldman noted that specific items like a 10 basis point contribution from wireless phone services and a 4 basis point addition from airfares influenced the core reading.

Focus Shifts to Forward Guidance

While a hike is anticipated, Goldman Sachs projects the FOMC will simultaneously signal a pause on further rate increases. The firm expects this will be communicated through several channels:

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• The official policy statement is likely to exclude specific guidance on the future path of interest rates.
• In his press conference, Chair Warsh may state the committee will "carefully assess" incoming data before making future decisions.
• The 'dot plot' of policymakers' projections is expected to show a narrow 10-8 majority in favor of just one rate hike this cycle.

Revised Rate Outlook

Reflecting the latest developments, Goldman Sachs has adjusted its own forecasts for the path of monetary policy. The firm raised its projection for the terminal federal funds rate to a range of 3.25%-3.5%, up from its previous forecast of 3%-3.25%.

Looking further ahead, the investment bank continues to expect two rate cuts in 2027. However, it has pushed back the timing for these cuts, now projecting them for September and December of that year, rather than June and December.