Goldman Sachs Also Changes Its Tune: The Fed Will Raise Interest Rates Next Week!

Goldman Sachs has joined Wall Street’s “hawkish shift” camp, incorporating a September Fed rate hike into its baseline forecast. After the release of August’s CPI data, the major Wall Street investment banks have basically reached a consensus on a “rate hike next week,” but there are clear divergences regarding the subsequent path.

David Mericle, Chief U.S. Economist at Goldman Sachs, stated clearly in his September 11 research report that the bank now expects the Fed to raise rates by 25 basis points at the two-day meeting ending on September 16, having previously forecast a hold. This shift was triggered directly by the newly published U.S. August CPI data: core CPI rose 0.3% month-on-month, higher than the market’s 0.2% expectation, pushing the market-implied probability of a September hike to around 90%.

It’s worth noting that Goldman’s “change of tune” this time is not based on a fundamental reassessment of the inflation outlook, but is more about maintaining the Fed’s credibility. David Mericle admitted, “The August CPI report only slightly raised our forecast for August core PCE to 0.26% and hasn’t changed our fundamental inflation view, but we believe the Fed will be unwilling to cause market disruptions by holding steady when markets have priced in a nearly 90% chance of a hike.” Currently, the latest market pricing for a rate hike next week is about 85%.

Goldman Sachs Shifts: Credibility Trumps Economic Judgment

The report notes that Goldman’s logic for this forecast adjustment is quite unique: the bank explicitly states, from an economic fundamentals perspective, there’s not a compelling need for a rate hike right now.

David Mericle points out in the report that Goldman still believes the portions of inflation exceeding the 2% target can be entirely attributed to one-off factors, whose impact is expected to gradually fade; in the past three months, core PCE inflation has improved to an annualized pace of about 2.5%, which is an early signal supporting this view.

Furthermore, Goldman believes the economy is not currently overheating, inflation expectations remain anchored, and the limited magnitude of a rate hike would not do much to counteract inflationary effects from supply shocks.

However, what ultimately prompted Goldman’s shift was a judgment about Fed communication credibility. The report notes that Fed Chair Powell’s hawkish speech at Jackson Hole had led markets to expect that “if the inflation data aren’t perfect, the Fed will hike.” Although the August CPI data weren’t concerning, they certainly weren’t “perfect.” In this context, if the Fed were to hold rates, it could damage market perceptions of the credibility of its policies and trigger an immediate response in long-term rates.

Goldman also noted that the recent oil price increases could sway some previously hesitant FOMC voters toward supporting a hike; even those who agree with Goldman’s inflation view might choose not to oppose a hike simply to avoid repeatedly explaining “high inflation is not a sign of overheating.”

Wall Street Turns in Unison: September Rate Hike Becomes Consensus

Goldman is not alone. An article from WallstreetCN wrote that, after the release of August CPI data, several major Wall Street firms quickly revised their Fed rate forecasts, with a September rate hike increasingly becoming the baseline scenario for more institutions.

J.P. Morgan abandoned its previously more patient stance, adjusting its forecast to 25-basis-point rate hikes in both September and December. Chief U.S. Economist Michael Feroli explained, the rationale for the hike is straightforward: every month this year, core PCE inflation has been above 3%, with only very limited progress toward the 2% target.

Citi economists Andrew Hollenhorst and Veronica Clark anticipate a 25-basis-point hike in September, arguing that core inflation topping expectations alongside a new surge in energy prices is “likely just enough to build a consensus.” Mitsubishi UFJ also completely abandoned its “no rate change until 2026” forecast and now expects a 25-basis-point hike in September.

Beyond Consensus: Clear Divergence Over Future Path

Although a September rate hike is now Wall Street consensus, there are marked differences between institutions regarding subsequent policy direction.

Regarding the path after September, Goldman is relatively cautious. David Mericle believes that further hikes at subsequent meetings are possible, but not the baseline forecast.

Goldman believes most FOMC members are inclined not to hike again at the October meeting—partly because it is close to the midterm elections, and partly because those skeptical about the necessity of another hike would likely prefer a more gradual tightening pace. As for December, Goldman expects inflation will further improve by then, and the effects of tariffs and the Iran war—key inflation drivers—will further fade away, making another hike much less necessary.

Goldman also points out that even a single 25-basis-point hike would have only a limited real impact on the economy.

TD Securities has the most hawkish position. Strategists including Oscar Munoz and Gennadiy Goldberg expect the Fed to kick off this rate-hiking cycle in September, with a total of three hikes: 25-basis-point increases in both September and October and a third hike in January 2027. The strategists argue that August CPI shows little inflation improvement and that the Fed needs to start a new tightening cycle.

J.P. Morgan expects two hikes this year but does not think the Fed will move at every meeting in a row. Michael Feroli sees reasonable grounds for holding steady in October—to watch how the hikes affect the economy. The bank’s baseline path is: hike in September, pause in October, hike again in December, and it does not expect the hiking cycle to continue into 2027.

Mitsubishi UFJ’s path is between the two above. The bank expects a hike in September, a pause in October, and a 55% to 60% chance of another hike in December. Of note, Mitsubishi UFJ clearly points out there is a possibility this hike could turn out to be a “policy mistake,” and has raised most U.S. Treasury yield forecasts by 25 to 50 basis points, expecting the 2-year Treasury to yield 4.25%, the 10-year at 4.625%, and the 30-year at 5% by year-end.

Citi’s forecast is the most dovish. The bank expects the Fed to hold rates steady all the way through June 2027 after this September hike. At that point, as inflation gradually recedes, rate cuts will resume, with three cuts expected by the end of 2027.