Goldman Sachs Withdraws 2026 Rate Cut Forecast, Raises Rate Hike Probability to 20%
Claire Weston
May payrolls nearly doubled expectations, and Goldman has officially abandoned its 2026 rate-cut forecast — pushing the last two cuts to 2027 and raising the odds of a hike from 10% to 20%. The labor market is too strong for the Fed to justify easing.
What exactly did Goldman change?
Chief U.S. economist David Mericle formally withdrew the 2026 rate-cut forecast, delaying the final two cuts from Dec 2026 / Mar 2027 to June and December 2027.
The probability of a rate hike doubled from 10% to 20%; the unemployment forecast dropped from 4.6% to 4.4%.
This means → Goldman no longer expects the Fed to move rates this year. "Hold steady" is now the baseline, not a tail scenario.
Why can one jobs report reshape the entire outlook?
May nonfarm payrolls came in at 172,000 — nearly twice the consensus estimate.
In plain terms = companies are still hiring aggressively. The economy has not cooled, and the Fed has no urgent reason to cut.
The strong data effectively closed the path of "labor market deteriorates → forced cut."
Why won't inflation come down?
Goldman attributes persistently high inflation to three forces stacking up: tariff pass-through, war-driven oil prices, and AI-related demand.
Their combined impact is expected to hold steady this year, keeping core PCE — the price gauge that strips out food and energy — above 3% year-on-year, well above the Fed's 2% target.
Yet the underlying drivers are actually soft: wage growth runs about 0.5 percentage points below the level consistent with 2% inflation, and leading indicators for rent growth sit at low levels.
This means → elevated inflation is largely sustained by external shocks. Once they fade, prices have room to fall — but Goldman sees inflation returning to 2% only around 2027.
Four scenarios — what are the odds?
Goldman's updated probability distribution: base case (two cuts next year) 30%, rates unchanged 25%, rate hike 20%, recession with deep cuts 25%.
Compared with the prior forecast, the base-case cut probability fell from 40% to 30% while the hike probability doubled. The other two scenarios held steady.
In plain terms = a rate cut is no longer the most likely outcome. "Do nothing" and "hike instead" together account for 45%.
What is the Fed itself signaling?
Goldman notes that several Fed officials have recently turned notably hawkish, stating that a hike is on the table if inflation worsens.
This reflects a key piece of logic: with the economy starting from a strong position, even a hike that later proves wrong would carry manageable costs — in other words, the bar for hiking has come down.
Goldman keeps its terminal-rate forecast at 3%–3.25%, citing a stable FOMC long-run dot plot over the past year.
Who is right — Goldman or the market?
Despite raising hike odds and lowering cut odds, Goldman's probability-weighted rate path remains well below current market pricing.
This means → Goldman believes the market has overpriced "rates staying high for longer." The gap will be tested by upcoming inflation data and Fed meetings.
A prolonged pause gives the Fed more time to be persuaded by solid economic performance that rates are already "just right" — the hold-steady path is migrating from tail scenario toward consensus.
Content is for reference only, not financial advice.