Goldman Sachs has also "changed its tune": the Federal Reserve will raise interest rates next week

Author: Wall Street Insights

Goldman Sachs has joined the Wall Street "hawkish" camp, incorporating a rate hike by the Federal Reserve in September into its baseline forecast. Major Wall Street investment banks have largely formed a consensus on "a rate hike next week" following the release of August CPI data, but there are significant divergences in their assessments of the subsequent path.

Goldman Sachs' Chief U.S. Economist David Mericle stated in a research report on September 11 that the bank now expects the Federal Reserve to raise rates by 25 basis points at the two-day meeting ending on September 16, previously predicting no change. This shift was directly triggered by the latest U.S. August CPI data—core CPI rose 0.3% month-on-month, exceeding the market expectation of 0.2%, prompting the market to price in a nearly 90% probability of a rate hike in September.

It is noteworthy that Goldman Sachs' "change of heart" is not based on a fundamental reassessment of the inflation situation, but rather on considerations of the Federal Reserve's credibility. David Mericle admitted, "The August CPI report only slightly raised our forecast for August core PCE to 0.26%, and did not change our fundamental judgment on inflation, but we believe that with the market pricing in a nearly 90% probability of a rate hike, the Federal Reserve would be reluctant to cause market turmoil by remaining inactive." Currently, the market's latest pricing for a rate hike next week is about 85%.

Goldman Sachs Turns: Credibility Considerations Outweigh Economic Judgments

The report states that Goldman Sachs' logic for adjusting its forecast is quite unique—the bank clearly states that from an economic fundamentals perspective, it does not believe there is a strong necessity for a rate hike at this time.

David Mericle pointed out in the report that Goldman Sachs still believes that the portion of inflation exceeding the 2% target can be entirely attributed to one-time factors, which are expected to gradually fade; the improvement in core PCE inflation to an annualized rate of about 2.5% over the past three months is an early signal of this judgment.

Furthermore, Goldman Sachs believes that the current economy is not overheating, and inflation expectations do not face an immediate risk of decoupling, while limited rate hikes would have a minimal effect on offsetting the inflation impact of supply shocks.

However, what ultimately prompted Goldman Sachs to turn was the judgment on the Federal Reserve's communication credibility. The report noted that Federal Reserve Chair Waller's hawkish speech at the Jackson Hole meeting has guided market expectations that "if inflation data is not perfect, then a rate hike will occur," and while the August CPI was not concerning, it was indeed "not perfect." In this context, if the Federal Reserve chooses to remain inactive, it could damage the market's perception of its policy credibility and trigger an immediate response in long-term interest rates.

Goldman Sachs also pointed out that the recent rise in oil prices may lead some previously undecided FOMC voters to lean towards supporting a rate hike; even those committee members who agree with Goldman Sachs' inflation assessment may choose not to oppose a rate hike due to fatigue from repeatedly explaining that "high inflation is not a signal of overheating."

Wall Street's Collective Shift, September Rate Hike Becomes Consensus

Goldman Sachs is not alone. An article from Wall Street Insights stated that after the release of the August CPI data, several major Wall Street institutions quickly adjusted their interest rate forecasts for the Federal Reserve, with a September rate hike becoming the baseline scenario for an increasing number of institutions.

JPMorgan has abandoned its previous wait-and-see stance, adjusting its forecast to include rate hikes of 25 basis points in both September and December. The bank's Chief U.S. Economist Michael Feroli stated that the rationale for a rate hike is straightforward: core PCE inflation has been above 3% every month this year, and recent progress towards the 2% target has been extremely limited.

Citigroup economists Andrew Hollenhorst and Veronica Clark expect the Federal Reserve to raise rates by 25 basis points in September, believing that the August core inflation exceeding expectations combined with rising energy prices "is likely just enough to facilitate consensus." Mitsubishi UFJ has also completely abandoned its prediction of "maintaining rates until 2026," instead forecasting a 25 basis point rate hike in September.

Beyond Consensus: Significant Divergence in Subsequent Paths

Although a September rate hike has become a consensus on Wall Street, there are significant divergences in institutions' assessments of the policy direction thereafter.

Regarding the path after September, Goldman Sachs' stance is relatively cautious. David Mericle believes that further rate hikes in subsequent meetings are possible, but not part of the baseline forecast.

Goldman Sachs believes that most FOMC members may prefer not to raise rates again at the October meeting—partly because the October meeting is close to the midterm elections, and partly because members who are skeptical about the necessity of a rate hike may wish to keep the pace of tightening at a more gradual level. As for December, Goldman Sachs expects that inflation trends will further improve by then, and the impacts of key inflation drivers such as tariffs and the Iran war will further dissipate, significantly reducing the necessity for another rate hike.

Goldman Sachs also noted that even a single 25 basis point rate hike would have a relatively limited actual impact on the economy.

TD Securities' stance is the most hawkish. Strategists including Oscar Munoz and Gennadiy Goldberg expect the Federal Reserve to initiate this round of rate hikes in September, with a total of three rate hikes—25 basis points each in September and October, and completing the third hike in January 2027. The strategists believe that the August CPI shows a lack of further improvement in inflation, making it necessary for the Federal Reserve to start a new tightening cycle.

JPMorgan expects two rate hikes this year but does not believe the Federal Reserve will act at every meeting consecutively. Michael Feroli believes there is a reasonable basis for pausing rate hikes in October—time is needed to observe the transmission effects of rate hikes on the economy. The bank's baseline path is: a rate hike in September, a pause in October, and another rate hike in December, and it does not believe the rate hike cycle will extend into 2027.

Mitsubishi UFJ's path lies between the two. The bank expects a rate hike in September followed by a pause in October, and estimates the probability of another rate hike in December to be 55% to 60%. Notably, Mitsubishi UFJ explicitly pointed out that this rate hike itself carries the possibility of becoming a "policy error," and has raised its forecasts for most tenured U.S. Treasury yields by 25 to 50 basis points, expecting the two-year Treasury yield to be 4.25% and the ten-year yield to be 4.625% by the end of the year.

Citigroup's forecast is the most moderate. The bank expects that after a rate hike in September, the Federal Reserve will remain inactive until June 2027, at which point it will resume rate cuts as inflation gradually declines, and will cumulatively cut rates three times before the end of 2027.