After the Federal Reserve released hawkish signals, Goldman Sachs changed its tune: it expects a further 25 basis point increase in October.

The Federal Reserve's September meeting was more hawkish than expected, forcing Goldman Sachs to quickly revise its forecasts—changing its initial view of a "one-off" rate hike path to a baseline scenario of consecutive rate hikes in September and October.

On September 16, the Federal Reserve unanimously approved raising the federal funds rate by 25 basis points to 3.75%-4.00%. The meeting was more hawkish than the market and Goldman Sachs itself had anticipated: 16 of the 18 members expected at least one more rate hike this year, the median dot plot showed that rates would remain unchanged until 2027, and the median forecast for the neutral rate jumped from 3.06% to 3.25%. Chairman Warsh used the phrase "removing a dose of easing" three times at the press conference, emphasizing that current financial conditions are "far from restrictive."

The yield on 2-year U.S. Treasury bonds rose sharply during the statement and press conference, and the market's pricing probability of an October rate hike jumped 8 percentage points to 51%, while expectations for a December rate hike rose to 78%.

Goldman Sachs economist David Mericle subsequently included an October rate hike in his baseline forecast, while maintaining his assessment of a terminal interest rate of 3.25%-3.50%, and offsetting the impact of the path adjustment by adding a 25 basis point rate cut in March 2028. Goldman Sachs set the probability of a three-rate-hike scenario with a higher terminal interest rate at 35%, the probability of a recession scenario at 15%, and the probability of the baseline scenario (two rate hikes followed by a drop to 3.25%-3.50%) at 50%.

The dot plot was more hawkish than expected, with "two rate hikes" becoming the mainstream view.

The results of this dot plot significantly deviated from Goldman Sachs' pre-meeting predictions. Goldman Sachs had expected most members to signal no further rate hikes this year, but the actual results were quite the opposite: of the 18 members, 12 expected two rate hikes this year (including the one in September), 4 expected three rate hikes, and only 2 held a more moderate stance.

Looking at the median interest rate path, it is projected to fall to 4.00%-4.25% by the end of 2026, remain unchanged in 2027, decline to 3.75%-4.00% in 2028, and further decrease to 3.50%-3.75% in 2029. The median neutral interest rate has been revised upward from 3.06% to 3.25%, a significantly larger adjustment than usual at a single meeting.

Meanwhile, the Summary of Economic Projections (SEP) also raised its forecasts for fundamentals: overall PCE inflation was revised upward by 0.1 percentage point to 3.7% in 2026, core PCE inflation was revised upward by 0.1 percentage point to 3.4%, GDP growth was slightly revised upward, and the unemployment rate forecast was revised downward by 0.2 percentage point to 4.1%. The FOMC statement was brief, without clear forward guidance, and added the statement that "domestic spending is resilient," characterizing this rate hike as "supporting a more timely return to the Committee's 2% target."

Warsh's rhetoric was tough, and his tolerance for inflation had significantly decreased.

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

He took a particularly hard line on inflation, stating bluntly that "inflation is too high and has lasted too long," pointing out that the current PCE is projected at 3.7%, with many sub-items still growing at over 3%, and expressing concern about rising commodity prices and the impact of geopolitics on commodity prices, believing that the overall risk to inflation is skewed to the upside. He also stated that other committee members "broadly agree" that current financial conditions are not restrictive. Notably, Warsh himself, like at the June meeting, again did not submit a dot plot forecast.

Goldman Sachs raised its probability of an October rate hike, but did not include further rate hikes in its benchmark.

Goldman Sachs' core logic for including the October rate hike in its benchmark is that since the Fed has already characterized this rate hike as a move to support a "more timely return" to the 2% target, it is more natural to follow up with it at consecutive meetings than with a rate hike every other day.

However, Goldman Sachs believes that more than two additional rate hikes are not the baseline scenario, mainly based on its own inflation forecast being lower than the median forecast of Federal Reserve members : Goldman Sachs expects core PCE to be 3.2% year-on-year in the fourth quarter of 2026 (the Fed median is 3.4%) and 2.2% in the fourth quarter of 2027 (the Fed median is 2.5%).

Goldman Sachs points out that part of the gap in the 2026 forecast may come from the reluctance of some committee members to include the downside impact of the methodology revisions to be implemented later this month – Goldman Sachs estimates that the revisions will reduce year-on-year growth by about 0.2 percentage points.

Goldman Sachs also acknowledges that the median interest rate in its dot plot for 2029 remains at 3.50%-3.75%, higher than the long-term neutral rate, posing an upside risk to terminal interest rates. One interpretation is that the Federal Reserve believes the AI investment boom will keep demand strong; another possibility is that the committee members have chosen a higher interest rate path to demonstrate their commitment to combating inflation, adjusting rates only after inflation subsides. David Mericle points out in his report that Goldman Sachs' probability-weighted path is currently still generally lower than market pricing.

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