Higher-than-expected US October CPI data released on Tuesday prompted Goldman Sachs to adjust its previous forecast that the Federal Reserve's current rate hike cycle would end in December.
The Wall Street financial giant now expects the Fed to raise rates by another 25 basis points in March next year.
US October headline and core CPI both came in above market expectations on a monthly basis, indicating that price pressures remain elevated and reinforcing the case for the Fed to continue raising rates.
Data released Tuesday by the US Bureau of Labor Statistics showed that US October CPI rose 0.4% month-over-month, above the market expectation of 0.3% and following a prior reading of 0.6%; core CPI, which excludes volatile items such as energy and food, rose 0.3% month-over-month, above the market expectation of 0.2% and matching the prior reading of 0.3% (October CPI and core CPI had no year-over-year figures because the US federal government shutdown in October of last year resulted in missing CPI data).
This CPI report is the last CPI data before the Fed's December 8-9 policy meeting (November CPI is scheduled for release on December 10, the day after the decision, at which point the year-over-year format will resume).
October nonfarm payrolls released last week showed 165,000 new jobs, far exceeding expectations, with the unemployment rate falling to 4.1%. Combined with the absence of cooling in core inflation this time, market focus has shifted to whether the December rate hike will be 25 or 50 basis points.
After the release of the US October CPI data, markets increased their bets on Fed rate hikes.
In addition to pricing in a near-100% probability of a December rate hike, markets raised their bets on a 50-basis-point increase next month and further increased wagers that the Fed will hike at least twice more before mid-2027.
Goldman Sachs is the first among its peers to adjust its forecast.
Goldman Sachs believes the Fed is more likely to raise rates again in March next year than in January.
The firm expects inflation to moderate somewhat by the end of this year, but with seasonal price pressures re-emerging in early next year and costs remaining elevated, inflation could rise again.
Goldman Sachs Chief US Economist David Mericle said: "By the March meeting next year, and possibly even by the January meeting, the energy shock may have largely passed. But we suspect that recent inflation data will prompt most members of the Federal Open Market Committee (FOMC) to signal in the December dot plot that a third rate hike will be needed."
In addition, Goldman Sachs now expects the Fed to begin cutting rates in December 2027, three months later than its previous forecast.
Goldman Sachs also expects the Fed to cut rates further in March, June and September 2028.
It is worth noting that the latest October CPI data happened to coincide with the threshold for a larger rate hike that Fed Governor Waller mentioned on Tuesday.
Waller said on Tuesday that he supports a December rate hike and warned that if inflation continues to accelerate, he would support a 50-basis-point increase to protect the Fed's credibility.
Waller said that despite a strong economy and a stable labor market, inflation remains too high.
Waller said: "If, as I expect, October inflation improves on a monthly basis, I would lean toward supporting a 25-basis-point increase in the policy rate."
"But if the October CPI data released later today is similar to the readings of the past two months — with core CPI inflation around 0.3% or even higher — then stronger policy action may be needed. In that case, I think a 50-basis-point hike should be considered at the December meeting."
Waller's blunt remarks are the strongest signal yet from a Fed official that policymakers not only need to raise rates in December, but that the increase could exceed the 25 basis points the market expects.
Chicago Fed President Austan Goolsbee, a 2027 FOMC voter, said in an interview on Tuesday that he described the latest inflation report as "worrying, with what can almost be called overheating inflation being very unsettling."
His biggest concern is that tariff and energy shocks have yet to fully fade and services inflation remains persistently high.
However, he did not explicitly support a 50-basis-point hike in December, instead stressing that no policy option can be ruled out in advance.
Philadelphia Fed President Anna Paulson was comparatively more cautious.
She supports raising rates at a gradual pace, saying that "for now, continuing to tighten policy gradually is appropriate."
She also noted that upward pressure on wages remains limited and that inflation expectations are still consistent with the central bank's 2% inflation target.
Paulson said: "Skipping one hike is merely adjusting the pace of increases, not a pivot. There will likely still be room for tightening afterward. But when conditions allow, I prefer gradual tightening."
She further explained that slowing the pace of rate hikes can give households, businesses and the financial sector time to adjust and buffer, and also makes it easier for policymakers to continuously assess economic data.
She said: "A gradual path works best when the policy direction is already well understood by the market. If the market already expects more tightening, gradual rate hikes will not leave us behind our policy goals."
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