Goldman Sachs Forecasts 25bp Fed Rate Hike on Wednesday as Markets Price 90% Odds

Goldman Sachs expects the Federal Reserve to raise its benchmark interest rate by 25 basis points at the September 15-16 FOMC meeting, reversing its earlier call for no change. As reported by Reuters, the shift follows hotter August inflation data that pushed market pricing for a hike to around 87-90%. The bank raised its terminal rate forecast to 3.25%-3.5% while still projecting two rate cuts in 2027.

Goldman Adds 25bp September Hike After CPI: Core Up 0.29%, Terminal Rate Raised to 3.25%-3.5%

Goldman Sachs economist David Mericle said the firm added a 25-basis-point September hike to its forecast after the August CPI report. Core CPI rose 0.29% month-over-month and 2.45% year-over-year, with wireless phone services contributing 10 basis points and airfares another 4 basis points amid higher oil prices. Goldman estimates core PCE prices increased 0.26% in August and 3.16% year-over-year after accounting for methodological changes.

The current federal funds target range stands at 3.50%-3.75%. A 25bp hike would lift it to 3.75%-4.00%. Markets priced an 87% chance of a quarter-point move earlier this week, rising toward 90% after the inflation data, according to CME FedWatch.

Goldman anticipates the FOMC statement will avoid forward guidance on further hikes. In the press conference, Chair Kevin Warsh is expected to signal that the committee will “carefully assess” incoming data or wait for multiple inflation reports before deciding next steps. The bank’s dot-plot projection shows a possible 10-8 majority favoring one hike, with some risk that a majority could support two hikes if more participants view the move as a response to higher oil prices.

The firm raised its terminal rate forecast to 3.25%-3.5% from 3%-3.25%. It continues to expect two rate cuts in 2027, now penciled in for September and December rather than June and December. Goldman also forecasts a 0.6% rise in core retail sales for August, above the 0.4% consensus, with 0.4 percentage points of the strength attributed to a rebound in nonstore retailers after a weak July linked to an earlier online shopping holiday.

Hike Odds Surge to Nearly 90% as Oil Tops $100 and Core CPI Stays Sticky

Investors rapidly adjusted rate expectations after the August CPI print showed persistent core pressures and energy-related increases. The jump in hike odds from roughly 70% to nearly 90% reflected concern that the Fed would be reluctant to hold rates steady and risk a negative market reaction. Higher oil prices above $100 a barrel, linked to Middle East tensions, added to the inflation narrative and reinforced the view that policymakers would deliver a “standard response” rather than surprise markets with a pause.

Fed Holds at 3.50%-3.75% Since Late 2025 as Inflation Stays Above 2% for Over Five Years

The Federal Reserve has held the federal funds rate in a 3.50%-3.75% range since late 2025. Inflation has remained above the 2% target for more than five years, with recent readings influenced by energy costs and sticky core components. Goldman previously expected no change at the September meeting but reversed course primarily because of market pricing rather than a major revision to its underlying inflation outlook.

J.P. Morgan has taken a more hawkish stance, forecasting quarter-point hikes in both September and December. Morgan Stanley also shifted late to expect a September increase. The upcoming decision marks the first potential rate hike since 2023 after a prolonged period of holding steady amid mixed labor-market and inflation signals.

What’s Next: FOMC Decision Sept 16, Focus on Dot Plot and Path to 2027 Cuts

The FOMC decision and statement are due on Wednesday, September 16, followed by Chair Warsh’s press conference. Markets will scrutinize any language on the future path of rates and the updated Summary of Economic Projections, including the dot plot. Attention will then turn to subsequent inflation and retail-sales data for clues on whether this becomes a one-and-done move or the start of further tightening before the expected 2027 cuts.