The Federal Reserve's September meeting delivered a more hawkish surprise than anticipated, prompting Goldman Sachs to swiftly adjust its projections. The investment bank has shifted its baseline scenario from a single rate hike to a path of consecutive increases in both September and October.
On September 16, the Federal Reserve unanimously voted to raise the federal funds rate by 25 basis points to a range of 3.75%-4.00%. The tone of the meeting proved more hawkish than both market expectations and Goldman Sachs' own forecasts: 16 of 18 committee members projected at least one more rate increase this year, the median dot plot indicated rates holding steady through 2027, and the median neutral rate projection jumped from 3.06% to 3.25%. Chair Warsh employed the phrase "removed a dose of accommodation" three times during the press conference, emphasizing that current financial conditions remain "far from restrictive levels."
The 2-year Treasury yield rose sharply during the statement release and press conference, with market pricing for an October rate hike jumping 8 percentage points to 51% on the day, while expectations for a December increase climbed to 78%.
Goldman Sachs economist David Mericle subsequently incorporated an October hike into the baseline forecast while maintaining the terminal rate projection of 3.25%-3.50% unchanged. To offset the path adjustment, the bank added a 25-basis-point rate cut in March 2028. Goldman Sachs assigns a 35% probability to a scenario of three hikes with a higher terminal rate, a 15% probability to a recession scenario, and a 50% probability to the baseline scenario of two hikes followed by a decline to 3.25%-3.50%.
The hawkish dot plot exceeded expectations, making "two hikes" the consensus view
The dot plot results diverged noticeably from Goldman Sachs' pre-meeting expectations. The bank had anticipated that most committee members would signal no further rate increases this year, but the actual outcome was quite different: of the 18 members, 12 projected two total hikes this year (including September), 4 projected three hikes, and only 2 held more moderate positions.
Looking at the median rate path, it is projected to land at 4.00%-4.25% by the end of 2026, remain unchanged through 2027, decline to 3.75%-4.00% by 2028, and further ease to 3.50%-3.75% by 2029. The median neutral rate was revised upward from 3.06% to 3.25%, a notably larger single-meeting adjustment than typical.
Meanwhile, the Summary of Economic Projections (SEP) also revised fundamental forecasts upward: overall PCE inflation for 2026 was raised 0.1 percentage point to 3.7%, core PCE inflation was raised 0.1 point to 3.4%, GDP growth projections saw modest upward revisions, and the unemployment rate forecast was lowered 0.2 points to 4.1%. The FOMC statement remained brief with no explicit forward guidance, adding a new phrase noting "resilience in domestic spending" and characterizing the hike as supporting "a more timely return to the Committee's 2% objective."
Warsh's hawkish rhetoric signals significantly lower inflation tolerance
Warsh's remarks were the most closely watched element of the meeting. He explicitly characterized the hike as merely "removing a dose of accommodation," repeating this phrase three times across his prepared remarks and the Q&A session, signaling that there remains ample room for further monetary tightening.
His stance on inflation was particularly assertive, stating bluntly that "inflation is too high and has persisted for too long." He noted that PCE is currently projected at 3.7%, that too many components are still growing above 3%, and expressed concerns about commodity price increases and geopolitical impacts on goods prices, viewing inflation risks as tilted to the upside. He also indicated that other committee members "broadly concur" with the assessment that financial conditions are not currently restrictive. Notably, Warsh again declined to submit his own dot plot projection, as he did at the June meeting.
Goldman Sachs raises October hike probability but stops short of adding more hikes to baseline
The core logic behind Goldman Sachs' decision to incorporate an October hike into its baseline lies in the Fed's characterization of this move as supporting a "more timely return" to the 2% target—making a follow-up at the consecutive meeting a more natural path than skipping a meeting.
However, Goldman Sachs does not view more than two additional hikes as the baseline scenario, primarily based on its own inflation forecasts running below the Fed committee's median: Goldman projects year-over-year core PCE at 3.2% for Q4 2026 (versus the Fed median of 3.4%) and 2.2% for Q4 2027 (versus the Fed median of 2.5%).
Goldman notes that part of the gap in 2026 projections may stem from some committee members being reluctant to incorporate the downward impact of methodology revisions scheduled for later this month—revisions Goldman estimates will reduce year-over-year growth by approximately 0.2 percentage points.
Goldman also acknowledges that the 2029 median rate in the dot plot remains at 3.50%-3.75%, above the longer-run neutral rate, which constitutes an upside risk to the terminal rate. One interpretation is that the Fed believes the AI investment boom will keep demand persistently strong; another possibility is that committee members have chosen to signal a higher rate path to demonstrate inflation-fighting resolve, with adjustments to follow once inflation recedes. David Mericle noted in the report that Goldman's probability-weighted path currently remains below market pricing overall.
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