Goldman Sachs has made a significant revision to its forecast concerning the US Federal Reserve’s interest rate policy, now projecting that the rates will remain unchanged through 2026. The investment bank foresees the first potential rate reductions occurring only in June and December of 2027, pushing back earlier predictions aimed for late 2026 or early 2027.
Why the Employment Outlook Matters
This adjustment in Goldman Sachs’ forecast is chiefly influenced by the surprisingly strong condition of the US labor market. Economist David Mericle from Goldman noted the robustness in recent employment statistics, which suggests the absence of immediate pressure for the Fed to lower rates.
David Mericle pointed out that, “the unemployment rate is expected to increase only modestly to 4.4% this year, which does not indicate significant labor market deterioration that would justify a rapid rate cut.”
Goldman has also fine-tuned its unemployment estimate, revising it down to 4.4% from a previous 4.6%. Though some indicators imply an economic slowdown, these are not compelling enough to prompt hasty rate cuts, according to the bank.
What Are the Inflationary Pressures?
Goldman Sachs has identified three key elements keeping inflation high: escalating trade tariffs, increased oil prices due to Middle Eastern geopolitical instability, and unexpected high demand driven by artificial intelligence investments. These factors might sustain inflationary pressures until 2026.
Consequently, the core Personal Consumption Expenditures (PCE) inflation rate is anticipated to stay above 3% through the remainder of 2026. It is only expected to approach the Fed’s 2% objective after 2027 begins.
Mericle remarked that wage growth is presently about 0.5 percentage points below the level consistent with steady 2% inflation rates. Furthermore, predictive indicators for rental prices also remain low, hinting that inflation might cool down after temporary forces wane.
Higher Chances of Rate Hike Considered
Goldman Sachs has become more cautious about potential rate cuts and now assigns a 20% chance, up from 10%, to the possibility of a rate hike. Nevertheless, their main scenario continues to exclude additional rate increases.
The bank maintains a terminal rate prediction within the 3% to 3.25% range, positing that a prolonged period without changes could lead Fed officials to conclude that steady rates are the right course.
“Our probability-weighted forecast remains notably more dovish than prevailing market expectations,” emphasized Goldman Sachs.
This perspective was echoed by a similar analysis from Nomura last month. Additionally, CME FedWatch data showcases a 75.5% probability within the market for a rate hike by year’s end. The Federal Reserve has yet to officially comment on Goldman Sachs’ updated projections.
