Why Goldman Sachs expects Fed to skip October rate hike

Investing.com -- Goldman Sachs expects the Federal Reserve to hold rates at this week’s meeting but deliver a second hike in December, stating in a note Monday that FOMC participants appear to have settled on a compromise of raising rates at every other meeting.

Economist David Mericle said the Fed’s hawkish pivot has tightened broad financial conditions moderately since September.

However, he noted that the tightening is only slightly more than is usually associated with one rate hike, and much less than the four hikes the market had priced. As a result, the FOMC is unlikely to view it as excessive or as a replacement for hikes.

Goldman said a key question is how the Fed will modify the statement language referring to its September hike. The bank thinks it may adapt language from a recent speech by Vice Chair Philip Jefferson.

“We do not expect significant new information from the press conference,” Mericle wrote.

He added that seemingly strong support for hiking every other meeting sets a high bar for deviating from that plan through year-end.

If the Fed maintains that pace in 2027, “it could consider hiking in March,” said Mericle. However, he does not expect that outcome.

“We do not expect a hike in March because we expect the inflation trend to improve as the effects of tariffs, the energy shock, and AI price pressures diminish,” the economist said.

However, Goldman said a March hike is possible if inflation data come in worse than expected.

“The most important risk is that oil futures are above our forecasts, largely reflecting concerns about potential further conflict with Iran,” Mericle said.

Market pricing now peaks just above 4.5%. Goldman’s forecasts are considerably less hawkish, as the bank is skeptical the Fed will hike four times and expects "cuts down the road."

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