According to Woofun AI, Goldman Sachs (GS.US) explicitly pushed back against the market's hawkish expectations for four rate hikes in an October 25, 2026 report, arguing that the Federal Open Market Committee (FOMC) will skip a hike in October and deliver its final increase in December.
Under this path, following the September hike that brought rates to 3.75% to 4.00%, the terminal rate for this cycle would land at 4.00% to 4.25%; the firm also expects that as inflation approaches the 2% target, the FOMC will pivot to rate cuts starting in late 2027, eventually returning to its estimated neutral rate of 3.25% to 3.5%.
This judgment stands in sharp contrast to the peak of 4.55% implied by federal funds rate futures, which suggest three more hikes through the fall of 2027 for a cumulative total of four.
Goldman Sachs believes the core of this divergence lies in differing interpretations of the nature of the inflation overshoot, with the market excessively worried about the persistence of temporary factors, while Goldman's baseline scenario rests on the logic that inflationary pressures will fade over time.
Notably, Goldman's probability-weighted path is even more dovish than its baseline scenario, because the firm expects the FOMC to pivot to rate cuts once inflation approaches the 2% target, a stance starkly different from the "higher for longer" narrative priced by the market.
This fundamental difference in views is reflected not only in the number of expected hikes but also in assessments of the degree of financial condition tightening and projections of the subsequent policy path, with Goldman firmly convinced that December will mark the end of the hiking cycle rather than a waypoint.
The underlying reason is that Goldman believes the current tightening of financial conditions is equivalent to only slightly more than one rate hike, far from sufficient to support the market's four-hike expectations, and that this tightening stems primarily from expectations of rising rates rather than substantive signs of economic overheating.
Therefore, the FOMC is unlikely to view the current financial environment as excessively tight, nor will it use that as a reason to substitute for rate hikes, and as long as data does not deteriorate markedly, the December hike path remains solid.
Woofun AI data shows that Goldman attributes the core Personal Consumption Expenditures (PCE) year-over-year overshoot of 1.1 percentage points above the 2% target entirely to three temporary factors: tariff pass-through, the Iran energy shock, and mismeasurement of AI price pressures.
On tariffs, the incremental pass-through to consumer prices from earlier rounds has largely ended, the year-over-year tax rate is expected to continue declining with favorable base effects; although the White House restored tariffs struck down by courts, Goldman views the boost to effective rates as 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, core PCE forecasts would rise by an additional 0.1 percentage points by March, and headline PCE by about 0.4 percentage points, but this remains a temporary shock.
On AI price pressures, Goldman expects the impact on core PCE year-over-year to peak in the coming months and decline noticeably in 2027, due to slowing AI demand growth and new memory capacity investment; the monthly impact of memory prices on consumer prices had some back-and-forth 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 believes reflects partly temporary factors; if pressures prove more persistent, firms 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 verification 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 the 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 four-hike pricing.
Goldman believes the Federal Open Market Committee (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, and rising rates depend largely on market expectations of further hikes; such 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 changes to the statement's wording rather than the policy action itself.
Goldman expects the FOMC to borrow from Vice Chair Jefferson's recent phrasing, making any further adjustments 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 focuses on observing trends, implying waiting for more data than between consecutive meetings, consistent with the compromise of hiking every other meeting.
If Warsh considers this phrasing too close to past forward guidance, the alternative is to make no statement on the policy outlook, but Goldman sees the former as more likely.
Notably, a hike already occurred in September, and Governor Waller said hikes need not come 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 threshold for deviating from the every-other-meeting hiking plan before year-end is high, because officials' statements point to this compromise and data has not yet shown signals requiring urgent action.
Looking at the subsequent hiking path, March is the next possible meeting for a hike, but if the FOMC maintains an 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 and the inflation trend will improve.
Some FOMC participants may share Goldman's view: the economy is not overheating, the inflation overshoot from past supply shocks needs time to fade, and using tighter monetary policy to reduce demand to offset the overshoot would impose 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 earlier.
However, the possibility of a March hike exists, provided inflation data is worse than Goldman expects.
Key risks include oil futures exceeding forecasts, an escalation of the Iran conflict causing a more extreme and persistent energy shock, broadening inflationary pressures, and a larger January effect.
Goldman believes the baseline scenario remains that hikes end in December, and the market's four-hike pricing 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 emphasized that as long as data does not deteriorate markedly, the December hike remains on track, with possible rate cuts to follow.
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 and the market on the hiking 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 demonstrates 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% for this cycle.
By contrast, the market's four-hike pricing implies excessive concern about inflation persistence and a misreading of financial condition tightening.
As more data is published from late 2026 to early 2027, especially the second-to-last inflation reading before the March meeting, this divergence will be tested.
If the temporary factors Goldman predicts fade on schedule, the market will face repricing risk, and the 4.55% peak expectation could be significantly revised down.
Conversely, if the Iran conflict escalates or the January effect amplifies and inflationary pressures broaden, 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 is 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 truly stops hiking after December.
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