Goldman Sachs: Fed to Hold in October, Expected to Deliver Second Rate Hike of This Cycle in December
nashnova research
Goldman expects the Fed to stand pat in October and deliver its second and final rate hike of this cycle in December. Inflation overshoot traces to supply shocks, not overheating demand — the end of tightening is near, not a restart.
October hold, December hike — where does this rhythm come from?
Fed Governor Waller said after September's meeting that hikes "need not occur at consecutive meetings, but should arrive within a reasonable timeframe."
This means → the Fed has settled on a skip-one cadence: hike in September, skip October, hike again in December.
Goldman sees the December move as the last hike of this cycle, followed by a wait-and-see stance.
Financial conditions already tightened — why isn't that enough?
Goldman's Financial Conditions Index (FCI) has tightened roughly 30 basis points since September — only slightly more than a single 25 bp hike typically produces.
In plain terms = markets have priced in four hikes' worth of tightening, but the actual squeeze equals barely one and a bit. The gap is wide.
The tightening comes mostly from higher rates, and those higher rates depend on markets expecting more hikes.
This means → if the Fed signals "we're done," rate expectations drop and the tightening effect unwinds on its own — so the Fed won't treat it as a reason to stop.
Why is inflation overshooting — is demand too hot?
Goldman attributes the entire 1.1 percentage-point overshoot of core PCE above the 2% target to three supply shocks: tariffs, the Iran energy shock, and mismeasured AI-related price pressure.
In plain terms = prices are rising not because people are spending too much, but because imports got more expensive, oil surged, and AI-linked goods are being mispriced in the data.
This reflects the Fed's dilemma: crushing demand via rate hikes to offset a supply shock carries too high a cost in jobs — a view some FOMC members share.
Energy and AI — what could push inflation higher?
Energy is the clearest upside risk: oil-price gains and wider refined-product spreads have already lifted core PCE by about 0.3 percentage points. If oil tracks the futures curve, it adds another ~0.1 pp by March 2027.
AI price pressure on core PCE is expected to peak around late 2026, then fade markedly in 2027.
Memory-chip price pass-through to consumer prices has been erratic this year, leaving several months of uncertainty ahead.
Will the December hike actually land — what decides it?
Goldman expects the three temporary supply shocks to fade, bringing inflation trends visibly lower by 2027 — so it does not forecast a March 2027 hike.
Whether December's hike arrives on schedule ultimately depends on inflation and employment data at that time.
This means → Goldman's base case is "hike in December, then stop," but if data deteriorate unexpectedly, the script is not locked in.
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