Three reasons Goldman has added another Fed rate hike to its forecast, higher and higher!
At a Glance
The recent upgrade by Goldman Sachs to forecast three rate hikes in the current cycle reflects renewed confidence in persistent inflation and the Fed's hawkish stance, which should bolster the US dollar and affect Treasury yields. Per the full note , Goldman's economists suggest a significant shift in the monetary policy outlook due to stronger-than-anticipated inflation data, specifically calling for a 25 basis point hike in December, followed by an additional hike likely in March 2027, with the potential for an earlier move as early as January. The rescheduled first rate cut now set for December 2027 emphasizes an extended period of high interest rates, which is expected to weigh on rate-sensitive assets like gold and equities. This shift not only underscores the impact of geopolitical factors—particularly rising oil prices—but also highlights marked changes in expectations surrounding inflation metrics, as the last three inflation prints were significantly above forecasts, thereby altering market dynamics.
Key Takeaways
- 01Goldman Sachs forecasts three rate hikes through 2027, reshaping market expectations.
- 02Revised inflation risk assessments suggest stronger USD and higher Treasury yields.
- 03Long-duration assets, equities, and gold may face downward pressure due to Fed policy.
- 04Geopolitical factors, especially oil prices, are influencing the inflation outlook significantly.
Full Analysis
What the desk is arguing
The desk interprets Goldman Sachs' latest assessment as a clear indication that increased inflation risks are prompting more aggressive monetary tightening from the Fed. The expectation of slower inflation readings later this year juxtaposed with potential spikes due to post-holiday consumption leads Goldman to suggest a more cautious but resolute approach by the Fed moving forward.
Moreover, the shift in Goldman's timeline for a rate cut to late 2027 further illustrates a commitment to restrictive monetary policy, which can contribute to a stronger dollar. The backing for additional hikes and a protracted restrictive environment creates headwinds for long-duration assets, enhancing the call for lower gold prices and elevated yields, reinforcing the notion of a bearish outlook for these sectors in parallel with a stronger dollar.
Where it sits in our coverage
Our current consensus target for the USD, particularly against the EUR, is 1.075, reflecting a range between 1.04 and 1.12 based on varying forecasts across firms. Among notable peers, our aligned firms include: - jpmorgan: target 1.10, tenor Mar26
In contrast, bofa has taken a differing stance, suggesting a more cautious approach with a target of 1.04, also for Mar26. This positioning reflects a divergence where Goldman’s outlook aligns more closely with the bullish narrative evident in the oil market dynamics.
How other firms see it
Several firms appear aligned with Goldman's bullish sentiment regarding the need for increased rates, including jpmorgan and citi, which suggests a similar understanding of the inflationary pressures. However, others like bofa hold a contrary view, arguing that the inflation expectations may stabilize sooner than predicted.
Market participants should keep an eye on the evolving rate talk from the Federal Reserve, particularly gauging any potential movements in the USD/EUR pair, which often reflects the central bank's decision-making process driven by inflation data readings and geopolitical developments.
Market Implications
Watch for inflation data releases in the coming months that could confirm or challenge Goldman's bullish rate expectations and impact the dollar's performance, particularly in relation to the 1.075 level against the Euro.
From the original
A tier-one bank moving to three hikes in the cycle supports the US dollar and front-end Treasury yields, and adds to pressure on rate-sensitive equities and gold. Pushing the first cut back to December 2027 extends the period of restrictive policy, which could weigh on long-durat
Related speeches
4 itemsGoldman 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.
Fed: Goldman adds March 2027 hike, pushes first cut to 2027 - Forextraders.com
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