Goldman Sachs Sees Two Rate Hikes Before Fed Halts Tightening Cycle

Goldman Sachs has raised its forecast for the Federal Reserve's terminal rate to two hikes, predicting that rates will remain steady after the October 27-28 meeting. The firm expects the second hike to occur at this meeting, following a 25-basis-point increase in September.

The core Personal Consumption Expenditures (PCE) inflation is expected to decline faster than the committee's expectations, with Goldman Sachs forecasting it to drop from the current 3.1% to around 2.2% by the end of 2027. This disparity in forecasts is at the heart of the divergence in their interest rate trajectory assessments.

Goldman Sachs' Chief Economist Jan Hatzius noted that market pricing is more hawkish than the firm's view, with a probability-weighted path showing the federal funds rate falling to a neutral rate of 3.25%-3.5% by the end of 2027. The market anticipates smaller rate cuts.

The main driver of the current hawkish shift is rising oil prices, although Goldman Sachs commodity strategists expect Brent crude to gradually fall to $85 per barrel by December. Refined product prices may remain elevated due to refining capacity constraints and geopolitical risks.