How does Goldman Sachs’s rate outlook differ from the market’s?

  • Goldman Sachs’s baseline calls for the Federal Reserve to raise rates twice, then cut them to 3.25%–3.5%. The bank assigns this outcome a 50% probability in its scenario analysis. A more hawkish scenario, with three hikes and a higher final rate, has a 35% probability; the recession scenario has a 15% probability.
  • Whether measured against its baseline or its probability-weighted scenario path, Goldman Sachs’s forecast is more dovish than market pricing. The difference reflects both fewer expected hikes and the bank’s forecast of subsequent cuts.

Where is the current core inflation overshoot coming from?

  • Goldman Sachs estimates that tariffs, the Iran energy shock and the mismeasured portion of AI-related price pressures together explain the full 1.1 percentage-point overshoot of core PCE inflation above the 2% target.
  • AI demand may create genuine price pressures while also raising measurement issues for software and accessory prices. Goldman Sachs expects the combined impact of these two components on year-over-year core PCE inflation to peak at the end of 2026 and decline significantly in 2027.

How will oil prices and the spread of price pressures affect inflation?

  • Goldman Sachs estimates that the energy shock has already raised year-over-year core PCE inflation by 0.3 percentage points. Under the bank’s oil price forecast, the impact will increase by another 0.1–0.15 percentage points; if oil prices follow the higher futures curve, the additional impact would be 0.25 percentage points.
  • Sales-price measures in business surveys can help track whether inflation is spreading more broadly: the manufacturing measure has jumped sharply, while the services measure remains at a more normal level.

How might financial conditions and the meeting statement’s wording change?

  • Goldman Sachs notes that US financial conditions have begun to tighten more noticeably since September, but the actual tightening remains limited relative to the shift in market expectations toward a more hawkish Fed rate path.
  • Goldman Sachs believes the Fed’s statement may draw on the policy guidance in Vice Chair Jefferson’s recent remarks: whether to make further adjustments to the target range for the federal funds rate will depend on trends in the data, the evolving economic outlook and the balance of risks.