Goldman Sachs has also "changed its tune": the Federal Reserve will raise interest rates next week!

Goldman Sachs has joined the Wall Street "hawkish" camp, incorporating a September rate hike by the Federal Reserve into its benchmark forecast. Major Wall Street investment banks have largely reached a consensus on a "rate hike next week" after the release of the August CPI data, but there are significant differences in their judgments on the subsequent path.

In a research report dated September 11, Goldman Sachs' chief U.S. economist, David Mericle, explicitly stated that the bank now expects the Federal Reserve to raise interest rates by 25 basis points at its two-day meeting ending September 16, a change from its previous forecast of no change. This shift was directly triggered by the latest U.S. August CPI data—core CPI rose 0.3% month-on-month, higher than the market expectation of 0.2%, pushing the market to price in a September rate hike probability of approximately 90%.

It's worth noting that Goldman Sachs' recent "change of heart" is not based on a fundamental reassessment of the inflation situation, but rather on considerations of the Federal Reserve's credibility. David Mericle frankly stated, "The August CPI report only slightly raised our August core PCE forecast to 0.26%, which did not change our basic assessment of inflation. However, we believe that with the market already pricing in a near 90% probability of a rate hike, the Fed will be unwilling to trigger market turmoil by remaining on hold." Currently, the market's latest pricing for a rate hike next week is approximately 85%.

Goldman Sachs shifts focus: Reputation considerations override economic judgment

The report states that Goldman Sachs' logic for adjusting its forecasts is quite unique—the bank explicitly stated that, from an economic fundamentals perspective, it does not believe there is a strong need for interest rate hikes at present .

In his report, David Mericle noted that Goldman Sachs still believes that the portion of inflation exceeding the 2% target can be entirely attributed to one-off factors, the effects of which are expected to gradually fade; the improvement in core PCE inflation to an annualized rate of approximately 2.5% over the past three months is an early sign of this judgment.

Furthermore, Goldman Sachs believes that the current economy is not overheated, and inflation expectations are not at risk of immediately losing their anchor. Limited interest rate hikes will have a limited effect on offsetting the inflationary impact of supply shocks.

However, what ultimately prompted Goldman Sachs to shift its stance was its assessment of the Federal Reserve's credibility. The report pointed out that Fed Chairman Warsh's hawkish remarks at the Jackson Hole conference had guided market expectations to a rate hike if inflation data was not perfect , and while the August CPI was not alarming, it was indeed "not perfect." Against this backdrop, if the Fed chose to remain on hold, it could damage the market's perception of its policy credibility and trigger an immediate reaction in long-term interest rates.

Goldman Sachs also pointed out that the recent rise in oil prices may make some FOMC voting members who were previously wavering more inclined to support interest rate hikes; and even those members who agree with Goldman Sachs' inflation assessment may choose not to oppose interest rate hikes because they are tired of repeatedly explaining that "high inflation is not an overheating signal".

Wall Street has collectively shifted its stance, with a September rate hike becoming the consensus.

Goldman Sachs is not an isolated case. An article on Wall Street Insights states that after the release of the August CPI data, several major Wall Street institutions quickly adjusted their interest rate forecasts for the Federal Reserve, with a September rate hike becoming the baseline scenario for an increasing number of institutions .

JPMorgan Chase has abandoned its previous wait-and-see approach, revising its forecast to 25 basis point rate hikes in September and December. The bank's chief U.S. economist, Michael Feroli, stated that the rationale for the rate hike is straightforward: core PCE inflation has been above 3% every month this year, and recent progress toward the 2% target has been extremely limited.

Citigroup economists Andrew Hollenhorst and Veronica Clark expect the Federal Reserve to raise interest rates by 25 basis points in September, believing that higher-than-expected core inflation in August, coupled with a resurgence in energy prices, "is likely just enough to create consensus." Mitsubishi UFJ has also completely abandoned its forecast of "keeping interest rates unchanged until 2026," instead predicting a 25 basis point rate hike in September.

Beyond the consensus: Significant disagreements exist regarding subsequent paths.

Although a September rate hike is widely expected on Wall Street, opinions among institutions are clearly divided on the future policy direction.

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

Goldman Sachs believes that most FOMC members are likely to avoid another rate hike at the October meeting— partly because the October meeting is close to the midterm elections, and partly because members who are skeptical about the necessity of a rate hike may want to keep the tightening pace more gradual . As for December, Goldman Sachs expects inflation trends to improve further by then, and the impact of key inflation drivers such as tariffs and the Iran war to subside, significantly reducing the need for another rate hike.

Goldman Sachs also pointed out that even if a single interest rate hike of 25 basis points is implemented, the actual impact on the economy will be quite limited.

TD Securities holds the most hawkish stance. Strategists including Oscar Munoz and Gennadiy Goldberg predict that the Federal Reserve will begin its current rate hike cycle in September, raising rates a total of three times— 25 basis points each in September and October , and completing the third rate hike in January 2027. Strategists believe that the August CPI data shows a lack of further improvement in inflation, necessitating the Fed to initiate a new tightening cycle.

JPMorgan Chase expects two rate hikes this year, but does not believe the Federal Reserve will act consecutively at every meeting. Michael Feroli believes there is a reasonable basis for pausing rate hikes in October—time is needed to observe the transmission effect of rate hikes on the economy. The bank's baseline path is: a rate hike in September, a pause in October, and another rate hike in December, and it does not believe the rate hike cycle will continue into 2027.

Mitsubishi UFJ's path lies somewhere in between. The bank anticipates a rate hike in September followed by a pause in October, and believes there's a 55% to 60% probability of another rate hike in December. Notably, Mitsubishi UFJ explicitly points out the possibility that this rate hike itself could be a "policy mistake," and has raised its yield forecasts for most maturities of US Treasury bonds by 25 to 50 basis points, projecting year-end yields of 4.25% for 2-year, 4.625% for 10-year, and 5% for 30-year.

Citigroup's forecast is the most moderate. The bank expects the Federal Reserve to hold rates steady until June 2027 after the September rate hike, at which point it will resume rate cuts as inflation gradually declines, and will cut rates three times in total by the end of 2027.

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