Goldman Sachs Changes Its Mind as Inflation Recedes: Why Will the Fed Raise Interest Rates?

Goldman Sachs has shifted its expectation to a Fed rate hike next week, despite no change in its fundamental inflation outlook.

A 25-basis-point rate hike by the Fed next Wednesday is now seen as nearly certain by markets. On Friday, Goldman Sachs also abandoned its previous expectation for a rate pause. The bank stated that the change in decision stems less from a shift in its core inflation view and more from the potential market reaction if rates are not raised.

The market is pricing in the probability of a rate hike at approximately 90 percent. According to Goldman Sachs, the Fed may want to avoid the volatility that failing to meet such strong market expectations could trigger.

In assessments reported by CoinDesk, this picture becomes even more striking as core CPI has fallen to 2.4 percent. The rate sits at its lowest level in five years. In contrast, expectations for a Fed rate hike are strengthening.

Is the Rate Hike Targeting Wall Street More Than Inflation?

James Thorne, chief market strategist at Wellington-Altus, viewed Goldman Sachs’ change of heart as an effort to soothe Wall Street. According to Thorne, rate hikes cannot produce oil, increase refinery capacity, or fix disrupted supply chains. Instead, they reduce demand, investment, employment, and household purchasing power.

Thorne also noted that wage growth has slowed to 3.1 percent on an annual basis and that there is no evidence of a wage-price spiral. According to this view, current data does not suggest that inflation is permanently accelerating.

However, KPMG chief economist Diane Swonk pointed out that the increase in core CPI is concentrated in services. Monthly growth in super-core services was 0.5 percent, with an annual increase of 3 percent. Swonk predicted that core PCE—the Fed’s preferred indicator—could rise 0.3 percent monthly in August, reaching an annualized pace of 3.4 percent.

Based on this outlook, Swonk announced that she expects three rate hikes by early 2027. She stated that such a move could bolster the inflation-fighting credibility that the bond market demands from the Fed.