Key facts
- Goldman Sachs now expects the US Federal Reserve to raise interest rates by 25 basis points at its October policy meeting.
- The bank cited the Fed's communication credibility as a key reason for its revised call.
- Goldman Sachs believes the Fed will act to avoid market turmoil and preserve its policy credibility.
- The August CPI report showed core inflation slightly above expectations.
Goldman Sachs has revised its forecast, now predicting a 25-basis-point rate hike by the Federal Reserve at its October meeting, adding to its previous call for a September hike. The Wall Street bank stated in a note that October is the most likely time for the next move, as it would support a "timelier return" to the Fed's 2% inflation target at consecutive meetings.
This adjustment follows the August CPI report, which showed core inflation slightly above expectations. While Goldman Sachs believes that from an economic fundamentals perspective, a strong necessity for a hike is absent, attributing above-target inflation to temporary factors, the bank cited the Fed's communication credibility as the key reason for its revised call. With markets pricing in a nearly 90% probability of a September hike following Fed Chair Waller's hawkish signals, Goldman believes the Fed will act to avoid market turmoil and preserve its policy credibility.
Goldman Sachs joins other major Wall Street institutions like JPMorgan, Citi, and Mitsubishi UFJ in anticipating a September hike after the CPI data. However, there is divergence regarding the subsequent policy path. Goldman Sachs adopts a cautious stance, viewing further hikes after September as possible but not its base case, suggesting the Fed may pause in October due to its proximity to midterm elections and a preference for a gradual pace.