Three reasons Goldman has added another Fed rate hike to its forecast, higher and higher!
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A significant drop in inflation reports or a quick stabilization in oil prices could trigger a reversal in the Fed's stance, resulting in earlier cuts and a weaker USD outlook than currently projected.
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-duration assets. The reversal of Goldman’s late-October call also shows how much oil is driving the outlook: the Middle East escalation it flagged as a risk has fed directly into the inflation data.
Further gains in crude, including from attacks on Hormuz shipping and Saudi Arabia’s East-West pipeline, would raise the odds of the hike coming in January rather than March. --- Three hot inflation prints have turned Goldman’s “maybe” on a March hike back into a “likely”. Summary: Goldman Sachs still expects a 25bp Fed hike in December and has added another 25bp hike in March 2027 The March move could come in January, but March is slightly more likely given expected milder November and December inflation data Goldman pushed its forecast for the first rate cut back a quarter, to December 2027 It expects most FOMC members to signal a third hike in the December dot plot The bank still sees inflation meaningfully lower by end-2027 as tariff, energy and AI pressures fade Goldman Sachs now expects the Federal Reserve to raise interest rates again in March 2027, following a quarter-point hike in December, after a third consecutive month of hotter-than-expected inflation data, the bank’s chief US economist David Mericle said in a note on Tuesday. Goldman continues to forecast a 25 basis point increase at the Fed’s December 8-9 meeting, which would be the second hike of the current tightening cycle.
The new March call adds a third. Mericle said the move could be brought forward to January, but March is slightly more likely. Inflation readings for November and December are expected to be relatively mild, while larger price increases early in the year are likely to lift January’s figures.
The bank also pushed back its forecast for the first rate cut by a quarter, to December 2027. The change follows October’s consumer price report, which showed a larger-than-expected rise. Goldman expects the run of firm inflation data to lead most Fed policymakers to signal a third hike in the December dot plot, and said a strong January inflation report would make delivering that hike the path of least resistance.
The bank remains confident, however, that inflation will be meaningfully lower by the end of 2027 as the effects of tariffs, the energy shock and AI-related price pressures fade. The forecast reverses a call Goldman made only weeks ago. In late October, the bank had removed a March hike from its base case.
It warned at the time that an escalation in the Middle East that drove oil prices higher, combined with persistent inflation, could change the Fed’s path. Its asset management arm has also cautioned that hotter inflation could force a more aggressive tightening cycle extending into 2027. Goldman’s revised outlook is broadly in line with Fed commentary this week.
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