After the October pause, why does Goldman Sachs think hikes can end in December?

  • Goldman Sachs expects the Fed to hold steady in October after raising rates in September, then hike once more in December and end this cycle. Recent statements by officials favor hikes at every other meeting, on the grounds that further tightening is not urgent and more time can be allowed to observe the data.
  • The market sees a higher endpoint: although it has removed one expected hike since the end of September, it still prices in roughly four hikes in total for this cycle, with the federal funds rate peaking at around 4.55% in autumn 2027. Goldman expects only two hikes and sees rate cuts once inflation approaches 2%; the disagreement concerns both the total number of hikes and the subsequent direction of rates.
  • Goldman Sachs expects limited new information from the October press conference: the bar for departing from the every-other-meeting pace before year-end is high. What will determine the cycle’s length is the path of inflation in 2027, rather than this pause itself.

Financial conditions have already tightened. Why continue raising rates?

  • The Goldman Sachs US Financial Conditions Index has tightened by about 30 basis points since September, only slightly more than the tightening normally associated with a single 25-basis-point hike and far less than the effect normally associated with the four hikes priced in by markets. Previously, rising rates were offset by higher stock prices and narrower credit spreads, leaving overall financial conditions little changed for the year.
  • The tightening has mainly come from higher interest rates, which in turn depend on expectations of further hikes. Goldman therefore believes the Fed will neither regard the current tightening as excessive nor consider it a substitute for subsequent hikes.

Which inflation pressures must subside to support an end to rate hikes?

  • Goldman estimates that tariffs, the energy shock caused by the Iran war, and the mismeasured portion of AI-related price pressures together explain the entire 1.1-percentage-point gap between current core PCE inflation and the 2% target. Its expectation that hikes will stop rests on these shocks gradually fading.
  • On tariffs, Goldman believes the additional pass-through of earlier tariff increases to consumer prices has largely ended, and the year-over-year impact will fall as the comparison base rises. White House replacements for tariffs struck down by the courts could slightly raise the effective tariff rate, but the bank expects a limited price impact.
  • On AI, Goldman expects the contribution of related pressures to year-over-year core PCE inflation to peak at the end of 2026 and decline markedly in 2027: slower growth in AI demand and new memory capacity will reduce increases in memory and computer prices. However, the month-to-month pass-through of this year’s memory price increases to consumer prices has been uneven.

What could extend rate hikes through March 2027?

  • Energy is the clearest upside risk to Goldman’s inflation forecast. It estimates that increases in oil prices and refined-product price spreads have already raised core PCE inflation by 0.3 percentage points and will add another 0.1–0.15 percentage points in the baseline scenario. If oil prices follow a futures curve above the bank’s forecast, core and headline PCE inflation by March will be respectively 0.1 and about 0.4 percentage points higher than the baseline.
  • If the shocks persist, businesses may pass on costs when adjusting prices at the start of the year, amplifying the “January effect”; this inflation release is the penultimate reading before the March meeting. Sales-price indicators in manufacturing surveys have already risen significantly, while services remain at a more normal level; the extent to which price pressures spread will affect the need for further hikes.
  • A constraint in the other direction comes from employment. Goldman believes the economy is not overheating and that using tightening to suppress demand to offset supply shocks would impose too high a cost on employment. If high energy prices erode real income and weigh on consumption, or financial conditions tighten sharply further, raising concerns about growth and employment, officials would also be prompted to stop raising rates.