Author: Wall Street Insights

Goldman Sachs has joined the "hawkish" camp on Wall Street, incorporating a rate hike in September into its baseline forecast. After the release of the August CPI data, major Wall Street investment banks have largely formed a consensus on a "rate hike next week," but there are significant differences in the judgments about the subsequent path.

Goldman Sachs' Chief U.S. Economist David Mericle stated in a research report on September 11 that the bank now expects the Federal Reserve to raise rates by 25 basis points at the two-day meeting ending September 16, a shift from the previous forecast of no change. This change was directly triggered by the latest U.S. August CPI data—core CPI rose 0.3% month-over-month, higher than the market expectation of 0.2%, prompting the market to price in a nearly 90% probability of a rate hike in September.

It is worth noting that Goldman Sachs' "change of heart" is not based on a fundamental reassessment of the inflation situation, but rather on considerations of the Federal Reserve's credibility. David Mericle admitted, "The August CPI report only slightly raised our forecast for August core PCE to 0.26% and did not alter our basic judgment on inflation. However, we believe that, with the market pricing in a nearly 90% probability of a rate hike, the Fed would be reluctant to trigger market turmoil by standing pat." Currently, the market's latest pricing for a rate hike next week stands at about 85%.

Goldman Sachs Turns: Credibility Considerations Outweigh Economic Judgments

The report states that the reasoning behind Goldman Sachs' adjustment is quite unique—the bank clearly stated that from an economic fundamentals perspective, it does not believe there is a strong necessity to raise rates at this time.

David Mericle noted in the report that Goldman Sachs still believes that the portion of inflation exceeding the 2% target can be fully attributed to one-time factors, which are expected to gradually fade; the improvement in core PCE inflation to about a 2.5% annualized rate over the past three months is an early signal of this judgment.

Additionally, Goldman Sachs believes that the current economy is not overheating, and inflation expectations do not face immediate risks of losing their anchor, while limited rate hikes would have a minimal effect on offsetting the inflation impact from supply shocks.

However, what ultimately led Goldman Sachs to shift is its judgment on the credibility of the Fed's communication. The report points out that Federal Reserve Chairman Waller's hawkish remarks at the Jackson Hole meeting have guided market expectations of "raising rates if inflation data is not perfect," and while the August CPI was not concerning, it was indeed "not perfect." Against this backdrop, if the Fed chooses to stand pat, it could damage market perceptions of its policy credibility and trigger an immediate response in long-term rates.

Goldman Sachs also noted that the recent rise in oil prices may make some FOMC members, who were previously on the fence, more inclined to support a rate hike; even those committee members who agree with Goldman Sachs' inflation judgments may choose not to oppose a rate hike due to fatigue from continuously explaining that "high inflation is not a signal of overheating."

Wall Street's Collective Shift: September Rate Hike Becomes Consensus

Goldman Sachs is not alone in this. Wall Street Insights reported that after the release of the August CPI data, several major Wall Street institutions quickly adjusted their interest rate forecasts for the Federal Reserve, with a September rate hike becoming the baseline scenario for an increasing number of institutions.

JP Morgan abandoned its previous more wait-and-see stance, adjusting its forecast to 25 basis point hikes in both September and December. The bank's Chief U.S. Economist Michael Feroli stated that the rationale for raising rates is clear: core PCE inflation has exceeded 3% every month this year, and progress towards the 2% target has been extremely limited recently.

Citi economists Andrew Hollenhorst and Veronica Clark expect the Fed to raise rates by 25 basis points in September, suggesting that the August core inflation exceeding expectations, along with the recent rise in energy prices, "likely just adds up to enough to build consensus." MUFG has also completely abandoned its earlier prediction of keeping rates unchanged until 2026, now expecting a 25 basis point hike in September.

Beyond Consensus: Significant Divergence in Subsequent Paths

Although a September rate hike has become consensus on Wall Street, clear divergences have emerged regarding the direction of policy afterward.

For the post-September path, Goldman Sachs' position is relatively cautious. David Mericle believes that further rate hikes at subsequent meetings are possible, but not in the baseline forecast.

Goldman Sachs predicts that most FOMC members may prefer not to raise rates again at the October meeting—partly because the October meeting is close to the midterm elections, and partly because members who are skeptical about the necessity of rate hikes may wish to keep the pace of tightening more gradual. As for December, Goldman Sachs expects inflation trends to further improve by then, with the impacts of key inflation drivers such as tariffs and the Iran war also fading, thus reducing the necessity for another rate hike significantly.

Goldman Sachs also points out that even implementing a one-time 25 basis point rate hike would have a relatively limited actual impact on the economy.

TD Securities holds the most hawkish position. Strategists including Oscar Munoz and Gennadiy Goldberg expect the Fed to initiate this rate hike cycle in September, with a total of three rate hikes—25 basis points each in September, October, and concluding with a third hike in January 2027. They argue that the August CPI indicates a lack of further improvement in inflation, making it necessary for the Fed to start a new tightening cycle.

JP Morgan expects two rate hikes this year but does not believe the Fed will act at every meeting consecutively. Michael Feroli sees a reasonable basis for pausing a hike in October—there's a need for time to observe the economic transmission effects of rate hikes. Their baseline path indicates: a hike in September, a pause in October, and another hike in December, with no expectation of extending the rate hike cycle into 2027.

MUFG's path falls in between the two extremes. The bank expects a rate hike in September followed by a pause in October and estimates there is a 55% to 60% probability of another hike in December. Notably, MUFG explicitly states that this rate hike itself carries the risk of becoming a "policy error," and they have raised their yield forecasts for most maturities of U.S. Treasuries by 25 to 50 basis points, forecasting a year-end yield of 4.25% for the two-year, 4.625% for the ten-year, and 5% for the thirty-year.

Citi's forecast is the most moderate. The bank expects that after a September rate hike, the Fed will remain inactive until June 2027, at which point it will gradually resume rate cuts as inflation naturally declines, leading to a total of three rate cuts by the end of 2027.

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