According to Woofun AI, Goldman Sachs (GS.US) explicitly pushed back against hawkish market expectations for four rate hikes in its October 25, 2026 report, arguing that the Federal Open Market Committee (FOMC) will skip a hike in October and deliver the final increase in December.
Under this path, following the September hike to 3.75% to 4.00%, the terminal rate for this cycle would land at 4.00% to 4.25%. The bank also expects that as inflation approaches the 2% target, the FOMC will pivot to rate cuts starting from late 2027, eventually returning to its estimated neutral rate of 3.25% to 3.5%.
This assessment stands in sharp contrast to the peak of 4.55% implied by federal funds rate futures, which suggest three more hikes through autumn 2027, bringing the cumulative total to four. Goldman Sachs believes the core of this divergence lies in differing interpretations of the nature of the inflation overshoot, with the market overly concerned about the persistence of temporary factors, while Goldman's baseline scenario is built on the logic that inflationary pressures will fade over time.
Notably, Goldman's probability-weighted path is even more dovish than its baseline scenario, as the firm expects the FOMC to shift toward rate cuts once inflation approaches the 2% target, a stark departure from the market's higher-for-longer narrative. This fundamental difference in viewpoint is reflected not only in the forecast for the number of hikes but also in the assessment of the degree of financial condition tightening and the extrapolation of the subsequent policy path. Goldman firmly believes that December will mark the end of the hiking cycle, not a midway stop.
The deeper reason is that Goldman Sachs believes the current degree of financial condition tightening is equivalent to only slightly more than one rate hike, far from sufficient to justify the market's expectation of four hikes, and that this tightening stems primarily from expectations of rising rates rather than substantive signals of economic overheating. Therefore, the FOMC is unlikely to view the current financial environment as excessively tight, nor will it use it as a reason to substitute for rate hikes. As long as data does not deteriorate markedly, the December hike path remains solid.
Woofun AI data shows that Goldman Sachs attributes the phenomenon of core Personal Consumption Expenditures (PCE) overshooting the 2% target by 1.1 percentage points year-over-year entirely to three temporary factors: tariff pass-through, the Iran energy shock, and mismeasurement of AI price pressures. On tariffs, the incremental pass-through from earlier rounds to consumer prices has largely run its course, the year-over-year tax rate is expected to continue declining, and base effects are favorable. Although the White House restored tariffs that were struck down by courts, Goldman believes their boost to the effective tax rate is limited, and the earlier removal of tariffs had little impact on consumer prices, so the overall effect is manageable.
On energy, rising oil prices and refined product spreads have already pushed core PCE up by 0.3 percentage points, with the baseline forecast adding another 0.1 to 0.15 percentage points. If oil prices follow futures reflecting Middle East conflict concerns, the core PCE forecast would increase by another 0.1 percentage points by March, with headline PCE rising by about 0.4 percentage points, but this remains a temporary shock.
On AI price pressures, Goldman expects their impact on core PCE year-over-year to peak in the coming months and decline significantly by 2027, driven by slower AI demand growth and new memory capacity investment. The monthly impact of memory prices on consumer prices has been somewhat volatile in 2026, but uncertainty remains in the coming months. Additionally, the prices-received component of manufacturing surveys has risen sharply while services remain at normal levels, which Goldman views as reflecting some temporary factors. If pressures prove more persistent, companies may pass through costs via early-year price increases, amplifying the January effect. The second-to-last inflation reading before the March meeting will be a key validation point.
Structurally, these three factors together explain the entire overshoot, meaning that as they fade, the inflation trend will improve, supporting Goldman's judgment of a lower terminal rate and a shorter cycle. The more critical variable is that if these temporary factors fade as Goldman expects, then current high inflation readings are merely noise rather than a structural shift, providing a solid data foundation for the FOMC to stop hiking after December.
The Financial Conditions Index (FCI) has tightened by 30 basis points since September, slightly more than the 20 to 25 basis point FCI tightening Goldman typically associates with a 25 basis point hike, but far less than the tightening implied by the market's pricing of four hikes. Goldman believes the FOMC will not view current financial conditions as excessively tight, nor will it treat them as a substitute for rate hikes. The main source of financial condition tightening is rising interest rates, which largely depend on market expectations of further hikes. This expectation-dependent tightening differs from substantive economic overheating. Therefore, the FOMC will not stop hiking merely because financial conditions have tightened, but will focus on actual inflation and employment data.
The key at the October meeting lies in the modification of statement language rather than the policy action itself. Goldman expects the FOMC to borrow from Vice Chair Jefferson's recent phrasing, making any further adjustment to the federal funds rate target range to support a more timely return to the 2% target dependent on data trends, the evolving outlook, and the balance of risks. This sentence emphasizes observing trends, suggesting waiting for more data than between consecutive meetings, consistent with a compromise of hiking at every other meeting. If Warsh considers this phrasing too close to past forward guidance, the alternative would be to make no statement on the policy outlook, but Goldman sees the former as more likely.
Notably, a hike already occurred in September. Governor Waller indicated that hikes need not occur at consecutive meetings but should be delivered within an acceptable timeframe, supporting the rhythm of skipping October and hiking a second time in December. Warsh did not hint at a slowdown at the September press conference, and Goldman believes he may prefer to let others communicate this rhythm, so the press conference is expected to contain no major new information. The bar for deviating from the every-other-meeting hike plan before year-end is high, as officials' statements point to this compromise and data has not yet shown signals requiring urgent action.
Extrapolating the subsequent hike path, March is the next possible meeting for a hike, but if the FOMC maintains the every-other-meeting pace in 2027, there will be five additional months of inflation data for decision-making. Goldman expects no hike in March, as the effects of tariffs, the energy shock, and AI price pressures will fade, improving the inflation trend. Some FOMC participants may share Goldman's view: the economy is not overheating, the inflation overshoot from past supply shocks needs to be waited out, and using tighter monetary policy to reduce demand to offset the overshoot carries too high an employment cost, so they lean toward limiting the total size of the hiking cycle. If growth or employment concerns emerge, such as energy prices eroding real incomes, weakening consumer spending, or financial conditions tightening beyond current levels, hikes could end early.
However, a March hike is possible if inflation data turns out worse than Goldman expects. Key risks include oil futures exceeding forecasts, the Iran conflict escalating to make the energy shock more extreme and persistent, inflation pressures broadening, and a larger January effect. Goldman believes the baseline scenario remains a December end to hikes, and the market's pricing of four hikes is too hawkish because the market has not fully priced in the speed at which temporary factors will fade.
In its October 25, 2026 report, Goldman Sachs emphasized that as long as data does not deteriorate markedly, a December hike remains on track, with possible rate cuts thereafter. This judgment is based on a detailed decomposition of inflation dynamics and an accurate assessment of the nature of financial condition tightening, in sharp contrast to the market's panic-driven pricing. The more critical variable is that if the Iran conflict escalates or oil prices rise sharply, Goldman's baseline scenario may need adjustment, but under current information, a December finale remains the highest-probability path.
In summary, the divergence between Goldman Sachs and the market on the rate hike path is essentially a difference in judging whether the inflation overshoot is temporary or structural. By decomposing the three temporary factors of tariffs, energy, and AI, Goldman argues for the reversibility of the 1.1 percentage point core PCE overshoot, supporting its conclusion of a December finale and a terminal rate of 4.00% to 4.25%. In contrast, the market's pricing of four hikes implies excessive concern about inflation persistence and a misreading of financial condition tightening. As more data is released from late 2026 to early 2027, particularly the second-to-last inflation reading before the March meeting, this divergence will be validated. If Goldman's predicted temporary factors fade as expected, the market will face repricing risk, and the 4.55% peak expectation could be substantially revised down. Conversely, if the Iran conflict escalates or the January effect amplifies, spreading inflation pressures, Goldman's dovish path may need correction. But for now, Goldman's view offers another rational perspective, reminding investors to focus on data trends rather than panic sentiment. This marks another moment of significant divergence in market views on the policy path following the September hike, and Goldman's detailed decomposition provides an important reference for understanding the FOMC's potential logic. In the coming months, oil prices and tariffs will be two key variables determining whether inflation falls as Goldman expects and whether the FOMC will truly stop hiking after December.
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