Goldman: Fed Will Hike Rates on Wednesday to Avoid Disappointing Markets

The Federal Reserve is likely to raise its policy rate on Wednesday to avoid disappointing markets that have almost fully priced in a hike, according to Goldman Sachs. The FOMC kicked off its two-day policy meeting on Tuesday and officials are expected to announce their decision on the interest rate later this week.

Markets are currently pricing in a 93% probability of a 25 basis-point rate increase, as per the CME FedWatch tool. Goldman added a 25 basis-point rate hike to its forecast after the August CPI data showed consumer inflation and producer prices hitting three-month highs due to rising energy costs.

While Goldman doesn't see a strong economic case for a tighter policy at this point, they expect the FOMC to signal a slim majority of 10 members leaning towards a single hike this year in the dot plot. However, there's a risk that more participants could back two increases if they view this week's rate hike as a normal response to higher oil prices.

The impact of one-time factors keeping inflation above the 2% target is fading, with core personal consumption expenditure inflation improving to a 2.5% pace over the last three months. Goldman expects Fed Chair Kevin Warsh to provide little clarity on future policy steps during his post-meeting press conference.