Goldman Sachs has revised its outlook to expect the Federal Reserve to raise interest rates by a quarter percentage point at its next meeting, a move that comes as a surprise shift from the bank's recent forecasts. In a note obtained by TheStreet, Goldman Sachs Chief Economist David Mericle stated that the bank now anticipates this increase at the October 27-28 FOMC meeting. This prediction follows the central bank's unanimous 12-0 decision on Sept. 16 to lift the benchmark Federal Funds Rate to a range of 3.75% to 4%, a move that was widely anticipated by market participants.
The recent tightening reflects a renewed hawkish push by the Fed in response to persistent price pressures. These pressures are fueled by rising energy costs stemming from the Iran War and related geopolitical shocks. Fed policymakers had spent months in public and private discussions attempting to hold rates steady while allowing inflation to return to its 2% goal, a target that has been missed for 5.5 years.
Goldman Sachs cited specific data from the Sept. 16 meeting to justify its revised view. The bank highlighted that a 16-2 majority of policymakers projected at least one more hike this year, with no dissenting votes against the recent increase. Additionally, the median funds rate projection remained elevated through 2029, and the median neutral rate dot rose from 3.06% to 3.25%. Mericle also pointed to Fed Chairman Kevin Warsh, who described the recent hike as having "removed a dose of accommodation" three times during his remarks.
The bank's forecast change follows its earlier adjustment of the September outlook from a pause to a quarter-point increase, a move made after August CPI figures came in hotter than expected on Sept. 11. At that time, Goldman did not include another increase in its base case for October or December. The new note argues that October is the most likely time for the next move because it allows for consecutive meetings supporting "a timelier return" to the 2% target. While a December hike remains outside the base case, Goldman noted that additional hikes are possible.
The bank has kept its forecast for the terminal rate unchanged at 3.25-3.5%, adjusting for the new hikes by adding to expected rate cuts in September and December 2027, including a third 25 percentage point cut in March 2028. Market expectations align with this hawkish turn; the CME Group FedWatch Tool currently prices in a 53.1% likelihood of another quarter percentage point hike on Oct. 28 and an 87.5% probability of at least one additional hike on Dec. 9.
Warsh, who served as a Fed governor from 2006 to 2011 with a reputation as an inflation hawk, reaffirmed his commitment to taming inflation during a speech at Jackson Hole last month. At the FOMC press conference, he emphasized that while the Fed cannot control individual prices like oil or foodstuffs, it will ensure that changes in relative prices do not broaden out or create second and third order effects in the economy.
The Sept. 16 rate hike was the first since January 2023 and sent ripples through the financial system. The most immediate pressure hit short-term borrowing instruments such as variable-rate credit cards and student loans. Indirectly, the move impacts fixed-rate mortgage rates, which rely on Treasury yields, as well as corporate debt and capital investment.