Tonight, a "dovish rate hike"?

Wall Street is holding its breath ahead of the Federal Reserve's rate decision on Wednesday. Citi and Goldman Sachs are unusually aligned in their core assessments: this rate hike is almost certain, but it will be a "dovish hike"—the hike itself isn't the main issue; the focus is on what the Fed says, or doesn't say, after the hike.

According to Followwind Trading Desk, Citi’s latest report on September 15 indicates that the Fed will define this rate hike as a "calibration," implying there’s no necessity for further increases in the future. Similarly, Goldman Sachs wrote in its September 13 report that tonight's hike will be a "hike with no forward guidance", making clear that they do not believe this hike is economically justified; inflation above the 2% target can entirely be attributed to one-off factors, and the economy is not overheating.

Both Citi and Goldman Sachs expect that the median dot plot will show only one additional hike left before 2026, with rate cuts resuming in 2027. Given the upcoming methodological revision, the core PCE projection is expected to be revised downward from June’s data, offering data support for the cessation of hikes.

Despite the dovish baseline, Powell’s press conference remains the biggest uncertainty for the market. Citi believes that if Federal Reserve Chair Powell refuses to provide explicit forward guidance and merely emphasizes “more work to do,” the market may reprice for consecutive hikes in October and December, triggering sharp volatility in asset prices. Goldman Sachs believes Powell needs to stress during the press conference that the committee will "carefully assess" incoming data, hinting at a wait-and-see attitude, thereby guiding the market away from overconfidence in an October rate hike.

Analysts believe that tonight, the key isn’t "whether or not the rate will be raised," but “what will be said after the hike.” Every word Powell says will be scrutinized under the market’s magnifying glass.

Current market pricing has forced the Fed to make a decision. Goldman Sachs argues that after the release of August’s CPI data, the market-implied probability of a hike has approached 90%, and in order to avoid the sharp market reaction from standing pat, the Fed will be compelled to deliver a 25-basis-point hike at this meeting.

But this will be an unequivocally dovish move. Citi’s baseline forecast indicates that the forward guidance accompanying this hike will no longer point to further increases in policy rates.

Fed Chair Powell will likely downplay the move, calling it a “slight adjustment” or “calibration,” while hinting to the market that if inflation shows signs of falling back toward target, further hikes may not be necessary.

Goldman Sachs likewise expects the Fed’s statement to be kept to the bare minimum, avoiding forward guidance about the future rate path—that is, delivering a "hike with no signals."

Worth noting, Goldman anticipates that Fed Governor Waller will dissent. For the past three months, the annualized rate of core PCE inflation (including the impact of expected methodological revisions) has dropped to roughly 2.5%, below the 2.8% "hold" threshold Waller publicly set earlier.

Unlike Citi’s perspective rooted in strategy analysis, Goldman Sachs’ economic research team states directly, from a fundamentals standpoint, that there is no sufficient economic reason for raising the federal funds rate this time.

Goldman’s core argument: The entire overshoot above the 2% inflation target can be attributed to one-off factors whose impact will fade, including tariff effects, energy/Iran conflict impacts, software and parts price effects, and portfolio management effects. Goldman says the improvement in core PCE inflation to an annualized rate of about 2.5% between June and August (inclusive of anticipated methodological revisions) already shows early signs of these one-off shocks fading.

On inflation breadth, Goldman is equally skeptical. While more categories have recently seen prices rise at over a 3% annualized rate, Goldman points out that excluding tariff effects, the breadth of inflation is essentially in line with historical levels during 2% inflation eras—and tariff shocks have likely mostly run their course.

In addition, Goldman’s “Bottlenecks Tracker” indicates industry-level capacity constraints are now even less than pre-pandemic, mainly concentrated in a few sectors closely tied to the AI boom. The economy is not overheating—and overheating is usually the primary justification for hiking rates.

Macro evidence also suggests that limited rate hikes are unlikely to effectively offset the larger inflation effects brought about by supply shocks. This means that whether the Fed hikes rates or not, the main policy logic remains waiting for past shocks to subside naturally over time.

For this reason, Goldman believes some FOMC members are closely aligned with its inflation view, and the FOMC as a whole is unwilling to signal further hikes at this meeting.

Several components of the Summary of Economic Projections (SEP) will collectively reinforce this dovish tone.

Citi points out that the median dot plot will show only one more hike this year, and cuts will resume in 2027. This path aligns with the Fed’s current internal logic: a policy rate around 4% is already "somewhat restrictive," so as inflation returns to target, such restrictiveness should gradually be eased.

Goldman’s assessment of the dot plot breakdown is equally specific: they expect a narrow 10-to-8 majority showing only one hike in 2026 (with Waller and perhaps other members voting for zero hikes). Goldman’s rationale: some members are conflicted even about this hike itself, while others do not want to fuel further market expectations for additional tightening.

However, Goldman also highlights tail risks: if more members view this week’s hike as a normal response to oil price spikes and AI-driven demand—and as the start of a sequence of hikes—there is a non-negligible risk of a two-hike majority outcome.

On inflation forecasts, both institutions expect that the core PCE outlook will be revised downward due to methodological changes. Goldman expects the median core PCE inflation projection for 2026 in the September SEP to edge down from 3.3% in June to 3.2%, further supporting the case for stopping hikes.

Despite the dovish base case, Citi warns that the most important and hardest-to-predict variable for the overall tone will be how Chair Powell discusses this hike. Powell has a personal style that gives little forward guidance, leaving a huge opening for markets to price in more hawkish policy.

Citi believes that if Powell merely emphasizes “more work to do” without providing near-term rate guidance, the market may see this as a dangerous sign. In such a hawkish risk scenario, the market could expect hikes at both the October and December FOMC meetings, or even price in further hikes into 2027.

Goldman’s view of this scenario is more detailed: The FOMC likely wants to guide the market away from current almost-50% odds of an October hike—but not by stating it directly in the statement. Instead, Powell might say at the press conference that before taking further action, the FOMC will "carefully assess" upcoming data, or that it wants to see multiple forthcoming inflation reports, or watch how underlying inflation trends evolve—any such statement would imply the committee wants to gather more information over a period before acting.

Goldman adds, since many investors already see early November’s midterms as a political obstacle for an October hike, it would not be hard to dissuade the market from treating an October hike as the "default baseline."

Goldman outlines three scenarios:

• Baseline (50% probability): just one hike (this one), with cuts in September and December 2027; terminal rate at 3.25%-3.5%;
• Multiple hikes (35% probability): two to three total hikes, with a higher terminal rate;
• Recession (15% probability): economic downturn, monetary policy shifts.

Even factoring in the tail risk of multiple hikes, Goldman’s probability-weighted forecast for the federal funds rate remains far more dovish than current market pricing. Goldman also raises its terminal rate forecast from 3%-3.25% to 3.25%-3.5%, and postpones the first 2027 rate cut from June to September.

Citi especially highlights that recent wild swings in WTI crude and average US gasoline prices add extra complexity to the inflation outlook and the Fed’s policy path. Persistently high energy costs could shake the Fed’s view that inflation is "on target," bolstering the case for hawkish members.