Goldman Sachs Research Report Analysis: October FOMC to Skip Rate Hike, December Marked as Final Move
Written by: Rita
December marks the final rate hike. The market prices in four hikes, while Goldman Sachs forecasts only two. Federal funds rate futures show a peak of approximately 4.55%, implying three more hikes by autumn 2027, totaling four. In its report dated October 25, 2026, Goldman Sachs presents an opposing path: skip October, add a second—and final—hike in December, ending between 3.25% and 3.5%.
Goldman Sachs attributes this divergence to three temporary inflation factors. Tariff pass-through is nearing completion, the incremental impact of the Iran energy shock is limited, and the over-measurement component of AI-related price pressures peaks at the end of 2026. Core Personal Consumption Expenditures (PCE) currently exceeds targets by 1.1 percentage points, and Goldman Sachs calculates that these three factors combined account for the entire overshoot.
The tightening in financial conditions amounts to slightly more than one rate hike, far less than the four priced in by the market. Goldman Sachs believes the Federal Open Market Committee (FOMC) will not view current tightening as excessive, nor will it substitute actual rate hikes with tighter financial conditions. The key for the October meeting lies in the wording of the statement, not in policy action.
Skipped October, Wrapped Up in December
A rate hike already occurred in September. Recent statements from FOMC participants point to a compromise of hiking at alternate meetings. Governor Waller stated that rate hikes do not need to happen in consecutive meetings but must be implemented within an acceptable timeframe. Skipping October and adding a second hike in December aligns with Goldman Sachs' base case of "second and last."
The October statement may revise the language regarding the September rate hike. Goldman Sachs expects the FOMC to adopt Vice Chair Jefferson's recent phrasing: "Any further adjustment to the target range for the federal funds rate, to support timely return to 2% objectives, will depend on incoming data, evolving outlook, and balance of risks." This emphasis on observing trends implies a need for more data beyond what is typically reviewed between consecutive meetings.
The press conference is not expected to contain major new information. Support for hiking at alternate meetings appears strong, with a high threshold for deviating from this plan before year-end. Wash's September press conference did not hint at a slowdown; Goldman Sachs believes he may prefer others to convey that message.
Market Prices Four, Goldman Sachs Forecasts Two
Since late September, the market has removed one rate hike from its pricing, yet the peak remains near 4.55%, corresponding to a cumulative four hikes. Goldman Sachs' base case calls for only two hikes, ending between 3.25% and 3.5%. The probability-weighted path is more dovish than the base case because Goldman Sachs expects the FOMC to cut rates once inflation approaches 2%.
The Financial Conditions Index (FCI) has tightened by 30 basis points since September. This magnitude is slightly greater than the tightening typically associated with a single 25-basis-point hike, and far less than the tightening corresponding to the four hikes priced in by the market. Goldman Sachs believes the FOMC will not consider current financial conditions as overly tight, nor will it treat them as a substitute for rate hikes.
The gap between market pricing and Goldman Sachs' base case primarily concerns the number of rate hikes. Goldman Sachs doubts the FOMC will implement four hikes and also anticipates subsequent rate cuts. The market peak of 4.55% reflects a "higher for longer" scenario, whereas Goldman Sachs' path corresponds to "two and out."
Inflation Overshoot Stemming from Three Temporary Factors
Year-over-year core PCE exceeds the 2% target by 1.1 percentage points. Goldman Sachs calculates that tariffs, the Iran energy shock, and the over-measurement component of AI-related price pressures collectively explain the entire overshoot. This breakdown informs Goldman Sachs' judgment on the terminal rate.
Regarding tariffs, the incremental pass-through from early tariff rounds to consumer prices has largely concluded, and year-over-year tax rates should continue to decline, providing a favorable base effect. The White House reinstating tariffs overturned by courts would slightly elevate effective tariff rates, but Goldman Sachs views the impact as limited due to the modest rise in effective rates and the minimal prior impact of tariff removal on consumer prices.
On the energy front, rising crude oil prices and refined product crack spreads have already pushed up core PCE by 0.3 percentage points, with the base case forecasting an additional push of 0.1 to 0.15 percentage points. Oil futures are priced above Goldman Sachs' forecasts, reflecting concerns over further Middle East conflict. If oil prices follow futures, the core PCE forecast would increase by another 0.1 percentage point by March, raising overall PCE by approximately 0.4 percentage points.
Concerning AI-related price pressures, Goldman Sachs expects their impact on year-over-year core PCE to peak in the coming months and decline notably in 2027, driven by slowing AI demand growth and new storage capacity investments. The monthly impact of storage prices on consumer prices has been somewhat volatile this year, with continued uncertainty in the months ahead.
Price received indices in manufacturing surveys have risen sharply, while services remain at normal levels. Goldman Sachs believes this reflects certain temporary factors; if pressures prove more persistent, firms might attempt to pass on costs via price hikes early in the year, amplifying the January effect. The second-to-last inflation print before the March meeting is key.
Financial Condition Tightening Roughly Equivalent to One Rate Hike
The FCI has tightened by 30 basis points, an magnitude close to one rate hike. Goldman Sachs typically maps a single 25-basis-point hike to roughly 20 to 25 basis points of FCI tightening; the current magnitude is slightly higher than one hike. With the market pricing in four rate hikes, the FCI tightening is far less than what four would imply. Goldman Sachs believes the FOMC will not view current tightening as excessive.
The key question for the October meeting is how the statement revises the September rate hike language. Goldman Sachs expects adoption of Jefferson's phrasing, linking further adjustments to data trends, evolving outlook, and risk balance. If Wash considers this phrasing too close to past forward guidance, the alternative is to make no explicit statement about the policy outlook. Goldman Sachs views the former as more likely.
The source of financial condition tightening is primarily rising interest rates, which themselves depend heavily on expectations for further rate hikes. Goldman Sachs believes the FOMC will not treat this expectation-driven tightening as a substitute for actual rate hikes. As long as data does not deteriorate markedly, a December hike remains on the path.
High Threshold for a March Rate Hike
March is the next potential rate hike meeting. If the FOMC maintains an alternate-meeting rhythm through 2027, five additional months of inflation data will be available by then. Goldman Sachs expects no hike in March, as the impacts of tariffs, energy shocks, and AI-related price pressures fade and the inflation trend improves.
Some FOMC participants may agree with Goldman Sachs' assessment: the economy is not overheating, the inflation overshoot caused by past supply shocks needs time to dissipate, and the employment cost of using tighter monetary policy to reduce demand to offset the overshoot is too high. These participants may favor limiting the total size of the rate-hiking cycle. Should growth or employment concerns emerge—for instance, if energy prices erode real income, consumer spending weakens, or financial conditions tighten beyond current levels—the hiking cycle could end prematurely.
A March hike remains possible provided inflation data comes in worse than Goldman Sachs expects. Key risks include oil futures exceeding forecasts, escalation of the Iran conflict, more extreme and prolonged energy shocks, diffusion of inflation pressures, and a larger January effect. Goldman Sachs maintains that the base case remains ending hikes in December, making the market's pricing of four hikes relatively hawkish.
The difference between the market's four hikes and Goldman Sachs' two hinges on the pace at which the three temporary inflation factors recede. Five months of data remain before the March meeting, with oil prices and tariffs being two key variables.
Disclaimer
This article is compiled and interpreted by Chaoxiang Research based on a third-party brokerage research report (Goldman Sachs, October 25, 2026), incorporating an analysis of public market information. The ratings, price targets, earnings forecasts, and related assessments cited herein reflect the views of the respective brokerage's analysts, represent solely their affiliated institution's stance, do not constitute the views of Chaoxiang Research, and do not amount to any investment advice.
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