Why Goldman Sachs is now changing its Federal Reserve interest-rate forecast

By Jules Rimmer

The bank is particularly concerned about early 2027 price pressures

The inflation outlook has worsened for three consecutive months. Goldman Sachs sees another rate hike coming.

The upshot of last week's midterm elections and Tuesday's hotter-than-expected inflation data is that interest rates must probably rise above current market expectations, says Goldman Sachs.

On Wednesday, the bank added another rate hike in March, following data released a day earlier showing October's core consumer-price index hitting 3.75%.

Observing it was the third consecutive month of deteriorating inflation news, and taking note of Fed Governor Chris Waller's hawkish speech in London the same day, economist David Mercile predicted another 25 basis-point rate rise in March, adding to the one he foresees when the Fed meets on Dec. 8-9.

At present, rate traders are pricing in an almost 90% probability of a 25 basis-point hike at that meeting with 10% longshot chance for the 50 basis-point increase that Waller threatened Tuesday. Mericle expects the further tightening in March may be outlined in the Fed's dot plot - its projected rate chart - next month.

What concerns him is the prospect of start-of-the-year price increases in January that will amplify cost pressures, and leave the Fed little choice but to make monetary policy more restrictive.

GS predicts the third tightening of this cycle in March, owing to fresh costs increases in January. Eventually, they are betting inflation comes down, allowing rate cuts late 2027 into 2028

Still, the drop in oil (BRN00) prices convinces Mericle that the "bulk of the pass-through from the energy shock to consumer prices is behind us." By the end of 2027, Goldman expects inflation to have subsided and so they are betting on four cuts on a regular basis from late 2027, bringing the terminal fed-funds rate back down to 3.25% to 3.5% from 3.75% to 4% at present.

The yield on U.S. Treasury 2-year notes BX:TMUBMUSD02Y ended Tuesday at 4.75%, up 18 basis points on the day. This was the largest selloff in Treasury yields since April 2025.

U.S. bonds aren't being traded on Wednesday in observance with Veterans Day.

-Jules Rimmer

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11-11-26 0537ET