ICYMI: Goldman pushes next Fed hike to December, sees strong chance no more hikes are needed
At a Glance
The desk is interpreting Goldman's recent adjustment to its Fed rate hike expectations, pushing the next anticipated increase to December, indicating a potential peak in the current tightening cycle. Per the full note , this pivot correlates with a notable drop in 2-year Treasury yields, which fell by the largest margin in over a year, impacting dollar demand. The bank’s adjustments reflect a changing landscape as recent inflation data—specifically, an August PCE rise of 3.4% year-on-year, below expectations—emerges alongside dovish comments from Fed President John Williams. Amidst these shifts, traders should remain vigilant for the upcoming payroll report that could alter rate hike probabilities significantly, given the current market positioning around October rate hike expectations.
Key Takeaways
- 01Goldman's shift to a December hike forecast suggests an easing of future rate-tightening expectations.
- 022-year Treasury yields have experienced their largest drop in over a year, likely reflecting investor sentiment regarding rate hikes.
- 03The market is closely watching inflation data and payrolls for signals on future Fed actions.
- 04Oil prices remain a critical risk factor, potentially jeopardizing the softer inflation outlook.
Full Analysis
What the desk is arguing
The desk maintains that Goldman's forecast to delay the next Fed hike emphasizes a more cautious approach from the Federal Reserve, influenced by recent softer inflation readings. This reflects a prudent reconsideration of previous tightening paths, suggesting that additional hikes may not be necessary as signs of economic moderation emerge.
Goldman's exaggeration of a potential peak in the Fed's cycle is particularly relevant, as the CME FedWatch tool now shows odds for an October hike dropping below 40%, down from approximately 70% a week earlier. Such sentiment supports a prevailing view that the Fed may be approaching the end of its tightening trajectory.
Where it sits in our coverage
Our consensus target for the USD stands at 1.075, within a range of 1.04 to 1.12. The targets from major firms indicate a divided outlook: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's position, suggesting potential US dollar softness, lies at the midpoint of this spread. This dynamic reflects a broader hesitance consistent with market sentiment shifting away from aggressive rate hikes.
How other firms see it
Many firms align with the softer outlook indicated by Goldman, particularly regarding potential Fed policy shifts. Notably, jpmorgan supports a bullish USD stance while bofa expresses caution, expecting less depreciation.
Watch for the relationship between USD/EUR as inflation data continues to influence ECB policy dynamics. Further, shifts in Treasury yields will be pivotal in assessing the overall FX landscape, particularly around key central bank communications.
What the calendar says
With no high-impact U.S. events scheduled in the next 30 days, the immediate focus will be on the upcoming payrolls report, expected to be a key market mover for USD positioning as traders reassess the implications of the employment landscape on Fed policy tightening.
Market Implications
Monitor the 2-year Treasury yield as a bellwether for market sentiment towards the Fed, particularly given its significant recent drop. Additionally, the upcoming payroll report could greatly influence rate hike probabilities and USD positioning, creating volatility ahead of expected Fed communications.
From the original
Goldman's shift reinforces the rally at the short end of the Treasury curve, where 2-year yields posted their biggest one-day fall in more than a year on Thursday, and takes some support away from the US dollar. Oil is the main risk to the call: with Brent back above $100 on Chin
Related speeches
4 itemsGoldman calls September Fed hike very unlikely as inflation eases
The desk interprets Goldman's recent commentary as a reaffirmation of dovish sentiment regarding U.S. monetary policy, especially as it pertains to the September Fed meeting. According to Goldman Sachs chief economist Jan Hatzius, sluggish economic indicators—including retail sales and payroll data—indicate a lower likelihood of an interest rate hike, dropping expectations for a move in September to around 30% and shifting the next potential increase to January 2027 instead of December 2026. This dovish outlook signals a broader reset in market pricing, particularly for U.S. Treasuries, where a steepening curve reflects diminishing rate hike expectations. As noted in the commentary, “the markets have not yet fully priced Goldman's more dovish view,” as two-year yields remain elevated above 4%. Overall, this dovish shift may have implications for the dollar's strength across pairs such as EUR/USD, GBP/USD, and USD/JPY.
Goldman ditches one and done call, now sees a second Fed hike in October
The recent shift by Goldman Sachs to anticipate a second Federal Reserve rate hike as soon as October, abandoning their previous 'one and done' forecast, signals a more hawkish tone across the marketplace. Per the full note from InvestingLive, their expectations follow a more aggressive outlook from Wednesday's FOMC meeting, highlighted by a 16-2 dot plot supporting further hikes and an upward adjustment of the median neutral rate path to 3.25%. This recalibration suggests that other desks may also revise their timelines, enhancing support for both short-end yields and the U.S. dollar as markets price in a higher for longer scenario heading into the midterms. Furthermore, this creates a live meeting risk during a politically sensitive period, challenging previous assumptions about the Fed's timing strategy amidst the elections.
More like this
5 itemsECB policymaker Rehn flags energy and AI risks as rate outlook stays uncertain
Tokyo core CPI jumps to 2.7%, fastest in 10 months, strengthening BOJ rate hike case
Fed's Logan says rates need to rise another 50 bps or more to restore price stability
Fed's Cook names two inflation worries: the AI buildout and persistent supply shocks