After the Federal Reserve released hawkish signals, Goldman Sachs changed its stance: expects another 25 basis point hike in October

The Federal Reserve's September meeting was more hawkish than expected, forcing Goldman Sachs to quickly revise its forecast—changing its previous "one-time only" rate hike path to a new baseline scenario of consecutive rate hikes in September and October.

On September 16, the Federal Reserve passed the decision unanimously to raise the federal funds rate by 25 basis points to 3.75%-4.00%. The hawkish tone of the meeting exceeded both market and Goldman Sachs' own expectations: 16 out of 18 committee members anticipate at least one more rate hike this year. The median of the dot plot suggests rates will remain unchanged through 2027, and the median forecast for the neutral rate jumped from 3.06% to 3.25%. Chair Walsh repeatedly used the phrase "removed a dose of easing" three times in the press conference, emphasizing that current financial conditions are "far from restrictive."

The 2-year US Treasury yield spiked significantly during the statement and press conference. The market-implied probability of a rate hike in October increased by 8 percentage points to 51% on the day, and expectations for a December hike rose to 78%.

Goldman Sachs economist David Mericle immediately included an October rate hike in the baseline forecast, while maintaining the terminal rate at 3.25%-3.50%. To offset the path adjustment, he added a single 25bp rate cut in March 2028. Goldman Sachs assigns a 35% probability to a scenario of three hikes and a higher terminal rate, a 15% probability to a recession scenario, and assigns 50% to the baseline scenario (two rate hikes followed by a reduction to 3.25%-3.50%).

This dot plot result deviated significantly from Goldman's pre-meeting forecast. Goldman had expected the majority of members to indicate no further hikes this year, but the actual result was quite the opposite: Of 18 members, 12 expect two hikes for the year (including September), 4 expect three hikes, and only 2 hold a more dovish stance.

Looking at the median rate path, the rate is now expected to be at 4.00%-4.25% by the end of 2026, remain unchanged through 2027, fall back to 3.75%-4.00% in 2028, and decrease further to 3.50%-3.75% by 2029. The median neutral rate was raised from 3.06% to 3.25%, with the increase per meeting significantly larger than usual.

Meanwhile, this Summary of Economic Projections (SEP) raised its base forecasts in tandem: overall PCE inflation for 2026 was revised up by 0.1 percentage points to 3.7%, core PCE was up by 0.1 points to 3.4%, GDP growth was revised up slightly, and the unemployment rate forecast was cut by 0.2 percentage points to 4.1%. The FOMC statement was brief, with no explicit forward guidance, but added language noting that "domestic spending remains resilient," and described the current hike as "supporting a timelier return to the Committee's 2% target."

Walsh's remarks were the most closely watched variable at this meeting. He explicitly characterized this rate hike as only "removing a dose of easing," repeating this wording three times across his prepared remarks and Q&A session, implying there is still plenty of room for further policy tightening.

His stance on inflation was especially hawkish, bluntly stating "inflation is too high and has persisted too long." He noted that current PCE is expected at 3.7%, with too many components growing above 3%, and he expressed concern over rising commodity prices and the impact of geopolitics on these prices, believing inflation risks remain skewed to the upside. He also said that other committee members "broadly agree" that current financial conditions are not restrictive. Notably, just like at the June meeting, Walsh did not submit his own dot plot projection.

Goldman Sachs' core logic for adding an October hike to the baseline is: The Fed has now characterized this hike as supporting a “timelier return” to the 2% target, so hiking at consecutive meetings feels more natural than skipping meetings.

However, Goldman does not see additional hikes beyond two as the baseline, mainly because its own inflation forecast is below the median of Fed officials: Goldman expects year-over-year core PCE to be 3.2% in Q4 of 2026 (vs 3.4% for the Fed median), and 2.2% in Q4 of 2027 (Fed median 2.5%).

Goldman points out that part of the difference in the 2026 forecast may stem from some committee members being unwilling to pre-emptively incorporate the effects of a methodology change that will be implemented later this month—which Goldman estimates will lower the year-over-year growth rate by about 0.2 percentage points.

Goldman also acknowledges that the median for the 2029 rate in the dot plot remains at 3.50%-3.75%, higher than the long-term neutral rate, posing upside risk for the terminal rate. One interpretation is that the Fed believes the AI investment boom will keep demand persistently strong; another is that members are using a higher rate path to signal commitment to fighting inflation, to be adjusted down once inflation falls. David Mericle notes in the report that Goldman's probability-weighted path is still overall below market pricing.