Goldman Sachs drops surprise call for next Fed interest-rate hike

Goldman Sachs, in an abrupt pivot from just days ago, expects the Federal Reserve to raise interest rates by a quarter percentage point as soon as its next policymaking meeting in October.

Goldman Sachs Chief Economist David Mericle said in the note obtained by TheStreet that its revised forecast calls for another quarter-percentage-point hike at the October 27-28 FOMC meeting.

The unanimous 12-0 FOMC decision Sept. 16 lifted the Fed's benchmark Federal Funds Rate to a range of 3.75% to 4% and was widely expected by traders and Fed watchers.

It marked a renewed hawkish push to tighten monetary policy following persistent price pressures fueled by rising energy costs from the Iran War and related economic geopolitical shocks.

The rate hike was the result of months of public and private discussions by Fed policymakers who were trying to hold rates steady while allowing inflation to return to its 2% goal — a target it has missed for 5.5 years.

The quarterly dot plot forecast, or Summary of Economic Projections , also released Sept. 16, showed a median year-end funds rate of 3.6%, consistent with one additional 25-basis-point hike from the current midpoint. Sixteen of 18 participating policymakers anticipate at least one additional rate increase before the end of the year.

Goldman said the meeting was more hawkish than it had expected because:

"First, a 16-2 majority projected at least one more hike this year, and there were no dissenting votes against today's hike.

"Second, the median funds rate projection remained quite elevated through 2029, and the median neutral rate dot rose from 3.06% to 3.25%.

"Third, Chairman Warsh described the hike as having "removed a dose of accommodation" three times.

As I reported , Goldman had raised its September forecast from a Fed pause to a quarter-point increase, after August CPI figures came in hotter than expected Sept. 11, adding that another increase in October or December was not in its base case.

"We think October is the most likely time for the next move because it is most natural to deliver hikes that the FOMC presented today as supporting "a timelier return" to the 2% target at consecutive meetings," the new Goldman note said.

A December rate hike is not in Goldman's base case, although it added "additional hikes are possible."

"We have kept our forecast for the terminal rate unchanged at 3.25-3.5% by adding to the September and December 2027 rate cuts we already expected,'' including a third 25 percentage point rate cut in March 2028,'' Goldman said.