Goldman Sachs Revises Forecast: Expects Another 25bp Hike in October After Fed's Hawkish Signal

The core logic behind Goldman Sachs incorporating an October hike into its baseline is that the Fed has already characterized this hike as a measure supporting a "more timely return" to the 2% target, making consecutive meetings more natural than skipping one. However, Goldman Sachs believes that additional hikes beyond two are not the baseline scenario, primarily based on its own inflation forecast being lower than the median of Fed members.

The Fed's September meeting was more hawkish than expected, forcing Goldman Sachs to quickly revise its forecast—changing the originally anticipated "one-and-done" hike path to a baseline scenario of consecutive hikes in September and October.

On September 16, the Fed unanimously approved a 25 basis point hike in the federal funds rate to 3.75%-4.00%. The meeting's hawkishness exceeded market and Goldman Sachs' own expectations: 16 of 18 members expected at least one more hike this year, the median dot plot showed rates unchanged in 2027, and the median neutral rate forecast jumped from 3.06% to 3.25%; Chairman Powell used the phrase "removed a dose of easing" three times during the press conference, emphasizing that current financial conditions are "far from restrictive."

The 2-year Treasury yield rose significantly during the statement and press conference, with the market's implied probability of an October hike jumping 8 percentage points to 51% on the day, and expectations for a December hike rising to 78%.

Goldman Sachs economist David Mericle immediately incorporated an October hike into the baseline forecast, while maintaining the terminal rate range of 3.25%-3.50% unchanged, and offsetting the impact of the path adjustment by adding a 25 basis point cut in March 2028. Goldman Sachs assigns a 35% probability to a scenario of three hikes and a higher terminal rate, a 15% probability to a recession scenario, and a 50% probability to the baseline scenario (two hikes followed by a decline to 3.25%-3.50%).

Dot Plot More Hawkish Than Expected, "Two Hikes" Becomes Mainstream

The dot plot results significantly deviated from Goldman Sachs' pre-meeting expectations. Goldman Sachs had originally expected most members to signal no further hikes this year, but the actual result was the opposite: of the 18 members, 12 expected a total of two hikes this year (including the September hike), 4 expected three hikes, and only 2 held a more dovish stance.

From the median rate path, the end of 2026 is expected to be at 4.00%-4.25%, unchanged in 2027, falling to 3.75%-4.00% in 2028, and further to 3.50%-3.75% in 2029. The median neutral rate was raised from 3.06% to 3.25%, an unusually large adjustment for a single meeting.

Meanwhile, the Summary of Economic Projections (SEP) also upgraded its fundamental forecasts: headline PCE inflation for 2026 was raised by 0.1 percentage point to 3.7%, core PCE inflation was raised by 0.1 percentage point to 3.4%, GDP growth forecasts were slightly revised up, and the unemployment rate forecast was lowered by 0.2 percentage point to 4.1%. The FOMC statement was brief, with no explicit forward guidance, adding the phrase "domestic spending has been resilient" and characterizing this hike as "supporting a more timely return of inflation to the Committee's 2 percent objective."

Powell's Tough Tone, Inflation Tolerance Significantly Reduced

Powell's remarks were the most closely watched aspect of this meeting. He explicitly characterized this hike as merely "removing a dose of easing," and repeated this phrase three times in his prepared remarks and Q&A session, implying that there is still ample room for monetary tightening.

His stance on inflation was particularly tough, stating bluntly that "inflation is too high and has been too persistent," noting that current PCE is expected to be 3.7%, with too many components growing above 3%, and expressing concern about rising commodity prices and geopolitical impacts on goods prices, believing that inflation risks are tilted to the upside overall. He also said that other members "broadly agreed" with the judgment that financial conditions are not currently restrictive. Notably, Powell himself, as in the June meeting, again did not submit a dot plot forecast.

Goldman Sachs Raises October Hike Probability, But Does Not Include More Hikes in Baseline

The core logic behind Goldman Sachs incorporating an October hike into its baseline is that: since the Fed has already characterized this hike as a measure supporting a "more timely return" to the 2% target, following up at consecutive meetings is more natural than skipping one.

However, Goldman Sachs believes that additional hikes beyond two are not the baseline scenario, primarily based on its own inflation forecast being lower than the median of Fed members: Goldman Sachs expects year-over-year core PCE of 3.2% in Q4 2026 (Fed median 3.4%) and 2.2% in Q4 2027 (Fed median 2.5%).

Goldman Sachs notes that part of the gap in the 2026 forecast may come from some members' reluctance to incorporate in advance the downward impact of a methodology revision to be implemented later this month—Goldman Sachs estimates that this revision will reduce the year-over-year growth rate by about 0.2 percentage points.

Goldman Sachs also acknowledges that the median rate for 2029 in the dot plot remains at 3.50%-3.75%, above the long-term neutral rate, which constitutes an upside risk to the terminal rate. One interpretation is that the Fed believes the AI investment boom will keep demand persistently strong; another possibility is that members chose a higher rate path to demonstrate their resolve to fight inflation, and will adjust after inflation falls. David Mericle pointed out in the report that Goldman Sachs' probability-weighted path remains below market pricing overall.