Goldman Sachs expects Fed to skip October rate hike

Goldman Sachs said the Federal Reserve is set to skip raising interest rates at its October meeting this week but is likely to deliver a second hike in December. The investment bank said comments from FOMC participants since their last meeting point to a compromise to raise the funds rate every other meeting.

The Fed’s hawkish pivot has contributed to a large increase in interest rates that has driven a moderate tightening since September in broad financial conditions, according to Goldman Sachs. The tightening is only a bit more than is usually associated with one rate hike and much less than is usually associated with the four hikes the market has now priced, meaning that the FOMC is unlikely to see it as excessive or a replacement for hikes.

Goldman Sachs said a key question for the October meeting is how the FOMC will modify the sentence in its statement that refers to the hike at the September meeting. The bank said it might adapt language from Vice Chair Jefferson’s recent speech to say, "Any further adjustments to the target range for the federal funds rate to support a timelier return to the Committee’s 2 percent goal will depend on trends in the data, the evolving outlook, and the balance of risks."

Goldman Sachs does not expect new information from the press conference. The seemingly strong support for hiking every other meeting means there is likely a high bar to deviate from that plan through the end of the year, which should limit the impact of Fed communication for now.

If the FOMC sticks to an every-other-meeting pace in 2027, it could consider hiking in March, by which point five more months of inflation data will be available. Goldman Sachs does not expect a hike in March because it expects the inflation trend to improve as the effects of tariffs, the energy shock, and AI price pressures diminish.

A March hike is possible if the inflation numbers are worse than Goldman Sachs expects. The most important risk is that oil futures are above the bank’s forecasts, largely reflecting concerns about potential further conflict with Iran.

Market pricing of the Fed’s path has taken out one hike and now peaks at just over 4.5%. Goldman Sachs baseline and probability-weighted Fed forecasts are less hawkish, both because the bank is skeptical that the FOMC will hike four times and because it expects cuts down the road.