Goldman Sachs Delays Second Fed Rate Hike Call to December

Goldman Sachs pushed its forecast for a second Fed rate hike from October to December after softer August PCE inflation data cooled hike expectations.

Goldman Sachs has pushed back its forecast for the Federal Reserve's second rate hike, moving it from October to December after a softer-than-anticipated personal consumption expenditures inflation reading. According to Bloomberg reporting carried by KLSE Screener, the bank had previously forecast a 25-basis-point increase in October, but said in a note on Wednesday that it now sees a "strong chance that the FOMC will ultimately conclude that additional rate hikes are unnecessary." The shift followed August PCE data that came in below expectations, easing fears of another hike next month.

The move marks a notable consensus break because the Fed had just raised rates in September — its first hike in three years and the first policy move under new chief Kevin Warsh, per Bloomberg — in a bid to tackle inflation tied to Middle East uncertainty. A second October hike was widely anticipated, yet Goldman now expects 3% growth in PCE on a Q4-to-Q4 basis, well below the median FOMC participant's forecast of 3.4%, according to CoinGape. The bank also cited New York Fed President John Williams' comments signaling no urgency to raise rates as a reason for pushing the call back.

Traders repriced quickly. CME Group's FedWatch tool now implies roughly a 38% chance of an October hike, down from around 71% a week ago, according to Finimize, while CoinGape reports Polymarket data showing only a 32% chance of a 25-basis-point hike, down from as high as 70% last week, and a 64% chance the Fed holds rates steady. Finimize also notes that August PCE rose 3.4% year over year, below the 3.7% estimate in a Reuters poll. Bitcoin and the broader crypto market rebounded on the PCE data, per CoinGape, since a Fed hold is a positive for risk assets.

Market expectations feed directly into borrowing costs before the Fed ever votes. Finimize explains that when markets shift from pricing an October hike as likely to seeing it as less than a coin flip, lenders often adjust the benchmark rates used for variable-rate loans, with the effect showing up fastest in home equity lines of credit and adjustable-rate mortgages. The stakes are compounded by mixed signals from the Fed itself: CoinGape reports that Board Governor Michael Barr said a day earlier that more hikes may be necessary to bring inflation to the 2% target, warning that upside inflation risks have increased.

The employment report released this Friday is the next macro data point the market will watch ahead of the October FOMC meeting. According to CoinGape, a solid labor-market reading could strengthen the case that the FOMC is in a good position to make more rate hikes, keeping a December move alive even as an October action fades. Goldman's own view, stated in its research note, is that the Fed may ultimately deem a second hike this year unnecessary — a call that, if proven right, would mark a sharp turn from the tightening stance struck at the September meeting.