Fed Rate Hike Nearly Certain: Wall Street Banks Scramble to Realign Forecasts

A nearly certain Federal Reserve rate hike next week has left Wall Street banks scrambling to revise their forecasts. Goldman Sachs, Citi, and JPMorgan have all shifted their stance, incorporating a September Fed rate hike into their baseline forecasts after the release of US August CPI data.

The market-implied probability of a hike has surged to nearly 90%, with Goldman Sachs' Chief US Economist David Mericle citing concerns over the Federal Reserve's credibility as the driving force behind the revision. Mericle acknowledged that the August CPI report only nudged the core PCE forecast up marginally, but noted that the Fed would be reluctant to trigger market turmoil by standing pat.

The rate hike will transmit through five channels: interest rates, exchange rates, capital flows, external demand, and global inflation dynamics. This will produce pronounced sector divergence in China's A-share market, with insurers and high-dividend energy names benefiting as value assets, while tech and growth stocks face pressure.

Goldman Sachs also noted that rising rates do not equate to falling US equities; earnings growth is the true driver of bull markets. The market harbors three major misconceptions: that export sectors will inevitably rally, that A-shares face a full-blown bear market, and that a rate hike landing means the bad news is fully priced in.