Goldman Sachs (GS.US) refuted four rate hikes: overinflation was a temporary factor and ended in December

According to Woofun AI, Goldman Sachs (GS.US) clearly refuted the market's hawkish expectations of four rate hikes in a report dated October 25, 2026, arguing that the Federal Open Market Committee (FOMC) would skip the rate hike in October and carry out the final rate hike in December. According to this path, on the basis that interest rates have already been raised to 3.75% to 4.00% in September, the current round of interest rate hikes will end at 4.00% to 4.25%; the bank also expects that as inflation approaches the target of 2%, the FOMC will shift to cutting interest rates from the end of 2027, and eventually return to its estimated 3.25% to 3.5% neutral interest rate.

This judgment is in stark contrast to the peak of 4.55% implied by the market through federal funds rate futures. The latter suggests that interest rates will be raised three more times by the fall of 2027, for a total of four. Goldman Sachs believes that the core of this disagreement is a different interpretation of the nature of overregulation of inflation. The market is overly concerned about the persistence of temporary factors, while Goldman Sachs's benchmark scenario is based on the logic that inflationary pressure will subside over time.

Notably, Goldman Sachs's probabilistic weighted path is even more dovish than its benchmark scenario, because the agency anticipates that once inflation approaches the 2% target, the FOMC will shift to cutting interest rates, which is quite different from the “higher and longer” narrative of market pricing.

This fundamental difference of opinion is reflected not only in predicting the number of interest rate hikes, but also in evaluating the degree of tightening financial conditions and deducing the next policy path. Goldman Sachs firmly believes that December will be the end of the interest rate hike cycle, not the halfway point.

The underlying reason is that Goldman Sachs believes that the current tightening of financial conditions is only a little more than one rate hike, far insufficient to support market expectations of four rate hikes, and that this tightening is mainly due to expectations of rising interest rates, rather than a sign of substantial economic overheating. As a result, the FOMC is unlikely to see the current financial environment as excessively tightening, nor will it use it as an alternative reason to raise interest rates. As long as the data does not deteriorate significantly, the path to raising interest rates in December remains stable.

According to data compiled by Woofun AI, Goldman Sachs attributed core personal consumption expenditure (PCE) exceeding the 2% target by 1.1 percentage points year-on-year to three temporary factors: tariff transmission, Iran's energy shock, and erroneous measurement of AI price pressure. In terms of tariffs, the early round of incremental transmission of consumer prices has basically come to an end. The year-on-year tax rate is expected to continue to decline, and the base effect is beneficial;

Although the White House has reinstated the tariffs overturned by the court, Goldman Sachs believes that the increase in the effective tax rate is limited, and that the impact of the previous cancellation of tariffs on consumer prices is also minimal, so the overall impact is manageable. On the energy side, the rise in oil prices and the spread of refined oil products have pushed up the core PCE by 0.3 percentage points, and the benchmark forecast will be pushed by another 0.1 to 0.15 percentage points; if oil prices follow the futures trend reflecting concerns about the Middle East conflict, the core PCE forecast will increase by another 0.1 percentage points by March, and the overall PCE will increase by about 0.4 percentage points, but this is still a temporary impact. In terms of AI price pressure, Goldman Sachs expects its year-on-year impact on core PCE to peak in the next few months and decline significantly in 2027 due to a slowdown in AI demand growth and investment in new storage capacity; the monthly impact of storage prices on consumer prices was repeated in 2026, but there is still uncertainty in the next few months.

Furthermore, the price acceptance of the manufacturing survey has risen sharply, and the service sector is still at a normal level. Goldman Sachs believes this reflects some temporary factors. If the pressure lasts longer, companies may use price increases at the beginning of the year to pass on costs and amplify the January effect; the penultimate inflation data before the March meeting will be a key verification point.

From a structural point of view, these three factors together explain all the overadjustments, which means that as they subside, the inflation trend will improve, thus supporting Goldman Sachs's judgment that the end point of interest rate hikes is low and the period is short. The more critical variable is that if these temporary factors subside as expected by Goldman Sachs, then the current high inflation reading is just noise, not a structural shift, which provides a solid data basis for the FOMC to stop raising interest rates after December.

The Financial Conditions Index (FCI) has been tightened by 30 basis points since September. This margin is slightly higher than Goldman Sachs's usual 20 to 25 basis point FCI tightening in response to a 25 basis point rate hike, but far less than the degree of tightening corresponding to four rate hikes in market pricing. Goldman Sachs believes the Federal Open Market Committee (FOMC) will not view current financial conditions as excessively tight, nor as an alternative to raising interest rates. The main source of the tightening of financial conditions is rising interest rates, which largely depend on the market's expectations of further interest rate hikes. This tightening of reliance on expectations is different from substantial economic overheating.

Therefore, when formulating policies, the FOMC will not stop raising interest rates simply because financial conditions are tight, but will focus on actual data on inflation and employment. The key to the October meeting was a change in the wording of the statement, not the policy action itself. Goldman Sachs expects the FOMC to use Vice Chairman Jefferson's recent statement to further adjust the federal funds rate target range to support a more timely return to the 2% target, depending on data trends, evolving prospects, and risk balance. This sentence focuses on observing trends, and suggests that waiting for more data than between consecutive meetings is in line with the compromise plan of raising interest rates every other meeting.

If Walsh thinks this statement is too close to past forward guidance, the alternative is not to make any statement about the policy outlook, but Goldman Sachs believes the former is more likely. Notably, interest rates have already been raised once in September. Governor Waller said that the rate hike does not require continuous meetings, but must be in place within an acceptable period of time, which supports the rhythm of skipping October and adding a second time in December. Walsh didn't suggest a slowdown at the September press conference, and Goldman Sachs thought he might be more willing to let someone else convey this rhythm, so no major new information is expected at the press conference. The threshold for deviating from the plan to raise interest rates every second meeting before the end of the year is high, because the statements of officials point to this compromise plan, and the data does not yet show signs that urgent action is needed.

Judging from the subsequent rate hike path, March is the next possible meeting to raise interest rates, but if the FOMC maintains the pace of every other meeting in 2027, there will be an additional five months of inflation data for decision-making. Goldman Sachs doesn't expect interest rate hikes in March as the effects of tariffs, energy shocks, and AI price pressures will subside, and inflation trends will improve. Some FOMC participants may agree with Goldman Sachs: the economy is not overheating; the inflation overhang caused by supply shocks in the past needs to subside; tightening monetary policies to reduce demand to offset overstated employment costs is too large, so they tend to limit the overall scale of the interest rate hike cycle.

If growth or employment concerns arise, such as energy prices erode real income, consumer spending weakens, or financial conditions tighten beyond current levels, interest rate hikes may end prematurely. However, the possibility of interest rate hikes in March exists, provided that the inflation data is worse than Goldman Sachs estimates. Key risks include higher-than-expected oil price futures, more extreme and long-lasting energy shocks due to the escalation of the Iran conflict, the spread of inflationary pressure, and a greater January effect. Goldman Sachs believes that the benchmark scenario is still the end of interest rate hikes in December. The market's pricing is skewed by four rate hikes because the market has failed to fully account for the speed at which temporary factors subside. In its report of October 25, 2026, Goldman Sachs emphasized that as long as the data does not deteriorate significantly, the December rate hike is still on track, and interest rate cuts may follow.

This judgment is based on a detailed breakdown of inflation dynamics and an accurate assessment of the nature of the tightening of financial conditions, in stark contrast to the market's panic pricing. The more critical variable is that if the Iran conflict escalates or oil prices rise sharply, Goldman Sachs's benchmark scenario may need to be adjusted, but according to current information, ending in December is still the most likely path.

In summary, the differences between Goldman Sachs and the market on the path of interest rate hikes are essentially differences in judging whether the inflation overrun is temporary or a structural issue. Goldman Sachs demonstrated the reversibility of the core PCE overadjustment by 1.1 percentage points by dismantling the three temporary factors of tariffs, energy, and AI, thus supporting the conclusion that the December rate hike ended and the current round ended at 4.00% to 4.25%. By contrast, the four rate hikes in market pricing implied excessive concerns about the persistence of inflation and a misinterpretation of the tightening of financial conditions. This discrepancy will be validated as more data is released from the end of 2026 to the beginning of 2027, particularly the penultimate inflation data before the March meeting.

If the temporary factors predicted by Goldman Sachs subside as scheduled, the market will face the risk of repricing, and the 4.55% peak forecast may be drastically lowered. Conversely, if the Iran conflict escalates or the January effect escalates and inflationary pressure spreads, Goldman Sachs's dovish path may need to be revised. But for now, Goldman Sachs's view provides another rational perspective, reminding investors to focus on data trends rather than panic. Following the September rate hike, this is a time when the market once again showed significant differences over the policy path, and Goldman Sachs's detailed disassembly provides an important reference for understanding the potential logic of the FOMC. In the next few months, oil prices and tariffs will be the two key variables that determine whether inflation will fall as expected by Goldman Sachs and whether the FOMC will actually stop raising interest rates after December.