Goldman Sachs Pushes Second Rate Hike Forecast to December After Soft PCE Inflation Data

What happened

Goldman Sachs no longer expects a second Federal Reserve rate increase in October. It moved that forecast to December after August core PCE inflation came in near 3%, below expectations, and after comments from New York Fed President John Williams. The bank now expects 3% fourth-quarter core PCE inflation, below the Fed's median forecast of 3.4%.

Investing.com figures cited by the bank put August core PCE inflation 0.25% above July and 3.01% above a year earlier. Goldman tied part of the softer annual reading to methodological changes, including a revision to the portfolio management component.

CoinGape reported that the bank pushed its second rate hike call to December and now sees an October hike as unlikely. Goldman keeps a December increase in its forecast while judging it likely that the committee will decide no more hikes are needed.

Why it matters

The forecast lands after the Fed raised rates for the first time since 2023 at its September meeting, citing rising inflation tied to Middle East uncertainty. Polymarket put the chance of a 25 bps hike at 32%, down from as high as 70% the week before, and the chance of a hold at 64%. Bitcoin and the broader crypto market rebounded on the PCE data, which CoinGape described as a plus for risk assets.

Officials are not aligned. Fed Board Governor Michael Barr said more rate hikes may be necessary to bring inflation to the 2% target in a timely fashion, warned that upside inflation risks had increased, and pointed to high energy costs, Middle East uncertainty and demand linked to artificial intelligence investment. Williams, by contrast, saw no urgency to follow September's move with an immediate second hike.

What the data shows

Goldman forecasts 3% fourth-quarter core PCE inflation, 0.4 percentage points below the median 3.4% projection from Fed policymakers.

Second-quarter U.S. economic growth was revised up by 0.7 percentage points to a 2.2% annualized rate, helped by stronger consumption and investment. The bank cut its third-quarter growth tracking estimate by 0.1 percentage points to 3.3% after the goods trade deficit widened more than expected.

CME FedWatch odds for an October quarter-point increase fell from 70.9% on Monday to 49.3% on Tuesday afternoon. Polymarket showed a 32% chance of a 25 bps hike and a 64% chance the Fed holds rates steady.

Background

Earlier in September, Goldman had moved the other way. On Sep. 13 it backed a September hike after previously expecting the Fed to leave rates unchanged, and interest-rate futures gave an 87% probability to a September increase.

Before the PCE release, Williams had already pushed back on expectations for another October increase. Goldman revised its rate forecast after the September 30 inflation release and Williams' comments, according to the Investing.com report.

What is still unclear

• Whether the Fed hikes again in December is unresolved.
• Fed officials remain split, with Williams favoring patience and Barr warning that upside inflation risks have increased.
• Middle East uncertainty persists, and talks to end the U.S.-Iran war have not produced positive results.

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