Goldman Sachs Expects Fed to Raise Rates by 25 Basis Points in October
Goldman Sachs' Chief U.S. Economist David Mericle has revised his forecast to predict a 25 basis point rate hike by the Federal Reserve in October. Previously, the firm believed that the September hike would be the only one this year, adjusting its baseline to two hikes in 2026. Additional hikes may occur, but are not the baseline scenario.
The trigger is the September 16 meeting. The federal funds target range was raised by 25 basis points to 3.75% to 4.00%, marking the first rate hike in three years. The dot plot showed a 16 to 2 majority expecting at least one more hike this year, with four expecting two more; there were no dissenting votes. The neutral rate point was revised up from 3.06% to 3.25%, with the rate center still biased high through 2029. Chairman Kevin Warsh referred to this hike as merely "removing a dose of accommodation," stating that inflation is too high and persistent.
Goldman chose October as the next window for a hike because the committee framed subsequent tightening as supporting a "more timely" return to 2%. Two consecutive meetings of rate hikes would align with this wording. JPMorgan and Morgan Stanley prefer to place the next hike in December; Bank of America’s research department is more hawkish, predicting hikes in both October and December. The CME FedWatch tool indicates about 53% probability for an October hike and about 81% for December.
This marks Goldman’s second major revision of its path for the year. After the June employment data, the firm eliminated rate cuts in 2026, pushing remaining cuts to 2027, while still claiming that rate hikes were unlikely. Following Jackson Hole, market expectations for rate hikes surged, and Goldman leaned towards inaction before September unless inflation exceeded expectations. After Wednesday's meeting, the "one and done" scenario was discarded.
The asset side has been repriced for tightening. The average official 30-year mortgage rate rose to 6.95%, with some market quotes reaching 7.24%; the 10-year U.S. Treasury remains around 5%. The trading department may attract clients due to volatility, while underwriting and financing demand are under pressure. Goldman’s own stock price reacted limitedly to this forecast, as the prediction itself is not a policy commitment.
The market mechanism is rewriting expectations, not new economic data. Buyers are bond shorts and dollar longs incorporating continuous rate hikes into their models; sellers are funds that previously allocated to long-duration and growth stocks based on a "one and done" scenario. Beneficiaries are cash, short bonds, and trading desks; pressured are mortgages, leveraged buyouts, and valuations reliant on discount rates. Funds are shifting from rate cut trades to a path of policy rates stepping up another level.
Source: Public Information
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Goldman Sachs' rate forecast follows the dot plot rather than its previous memo. In June, it stated no hikes this year, and before September, it said only one hike, which was later revised to another hike in October. The speed of the revision indicates that sell-side research products are an "immediate translation of committee language," not independent macro models. Warsh's characterization of the rate hike as removing accommodation rather than being restrictive informs primary dealers that, after the neutral rate was revised up, the current range is still near neutral, not the endpoint.
The capital path is a forced rescheduling of positions based on the dot plot. The 16 to 2 expectation for another hike this year changes the October meeting from "skippable due to midterm elections" to an "active meeting." Funds first adjust federal funds futures, then two-year Treasury and MBS spreads, and finally stock styles. Bank of America includes both October and December, treating the hawkish dot plot as a path; Goldman only solidifies the most recent meeting and leaves the third hike dependent on data. The two approaches compete for the slope of the same curve.
Analogies should reference 2022 and 2018. After the dot plot was revised up in 2022, Wall Street repeatedly pushed the "peak rate" higher; in 2018, Powell's consecutive hikes caused a market drop in the fourth quarter. This time, the starting point is lower—after three years without a hike—but the rhetoric is firmer: a timely return to 2%. The industry position shifts from "rate cut trades after a soft landing" back to "further tightening due to unmet inflation," indicating a phase of expectation rebuilding, not pricing in a completed deep recession.
Structural judgments indicate a transfer of pricing power. Pricing power shifts from the probability of rate cuts in the futures market back to the committee's inflation timeline. The mechanism is that after the neutral rate point is revised up, the same policy rate appears looser, giving the committee reason to raise rates again at adjacent meetings; sell-side research can only write this into October, or risk falling behind the dot plot.
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- A change in the dot plot leads to a change in sell-side predictions.
- Saying it is merely removing accommodation implies further hikes are coming.
- Consecutive meeting rate hikes are more damaging to valuations than a one-time hike.