Goldman Sachs (GS.US) Refutes Four Rate Hikes: Inflation Overshoot Due to Temporary Factors, December Wrap-Up

According to Woofun AI, Goldman Sachs (GS.US) explicitly refuted the market's hawkish expectation of four rate hikes in a report dated October 25, 2026, arguing that the Federal Open Market Committee (FOMC) will skip a hike in October and deliver the final rate hike in December. Based on this path, after the rate hike in September brought rates to 3.75%–4.00%, the terminal rate for this cycle will reach 4.00%–4.25%. The firm also expects that as inflation approaches the 2% target, the FOMC will pivot to rate cuts starting at the end of 2027, eventually returning to its estimated neutral rate range of 3.25%–3.5%.

This outlook starkly contrasts with the peak of 4.55% implied by federal funds futures, which indicates the market expects three more hikes by autumn 2027, totaling four. Goldman Sachs believes that the core of this divergence lies in the different interpretations of inflation overshooting: the market is overly concerned about the persistence of transitory factors, while Goldman Sachs' baseline scenario is built on the logic that inflation pressures will ease over time.

It's noteworthy that Goldman Sachs' probability-weighted path is even more dovish than its baseline scenario since the firm expects the FOMC to pivot to cuts once inflation nears the 2% target, which is fundamentally different from the market's "higher for longer" narrative.

This fundamental difference in viewpoints is reflected not only in the forecast for the number of rate hikes but also in the assessment of financial tightening and the outlook for policy paths. Goldman Sachs firmly believes that December will mark the end of the hiking cycle, not just a pause.

The underlying reason is that Goldman Sachs reckons the current degree of financial tightening is equivalent to just over one rate hike–nowhere near enough to support the market's expectation of four hikes. Furthermore, this tightening is mainly driven by expectations of higher rates, rather than concrete signs of an overheating economy. Therefore, the FOMC is unlikely to view current financial conditions as excessively tight, nor will it use them as a substitute for rate hikes. As long as data do not worsen markedly, the path to a December hike remains solid.

According to data compiled by Woofun AI, Goldman Sachs fully attributes the current phenomenon of core Personal Consumption Expenditure (PCE) overshooting the 2% target by 1.1 percentage points to three transitory factors: tariff passthrough, Iran energy shock, and mismeasurement of AI price pressures. With regard to tariffs, the pass-through effect on consumer prices from earlier rounds has largely ended, year-on-year tariff rates are expected to keep falling, and base effects are favorable;

Although the White House reinstated tariffs that had been struck down by the courts, Goldman Sachs believes the resulting rise in the effective tariff rate is limited, and the previous removal of tariffs had little impact on consumer prices, making the overall effect manageable. On the energy front, the increase in oil prices and the widening of refined product spreads have pushed up core PCE by 0.3 percentage points, with forecasts suggesting an additional 0.1–0.15 percentage points. If oil prices track futures that reflect concerns over the Middle East conflict, core PCE projections for March will rise by another 0.1 percentage points, with overall PCE up by about 0.4 percentage points–but all these remain temporary shocks. Regarding AI price pressures, Goldman Sachs expects their impact on year-on-year core PCE to peak in the coming months and then drop significantly by 2027, due to slowing AI demand and new investments in storage capacity; while the monthly impact of storage prices on consumer prices will be volatile in 2026, uncertainty remains for the coming months.

Additionally, the price received indices in manufacturing surveys have risen sharply, while those in services remain at normal levels. Goldman Sachs sees this as partly reflecting transitory factors; if pressures become more persistent, firms may pass on costs through new-year price hikes, amplifying the January effect. The second-to-last inflation reading before the March meeting will be a crucial confirmation point.

Structurally, the three factors combined explain the entire overshoot, implying that as they fade, the inflation trend will improve, thus supporting Goldman Sachs' call for a lower and shorter hiking cycle. More critically, if these transitory drivers fade as Goldman Sachs expects, then the current high inflation readings are only noise, not a structural shift, providing solid data ground for the FOMC to halt hikes after December.

The Financial Conditions Index (FCI) has tightened by 30 basis points since September, a magnitude slightly above the 20–25 basis points FCI tightening that Goldman Sachs equates to a typical 25-basis-point rate hike, but far below the level consistent with four hikes as the market prices in. Goldman Sachs does not believe the FOMC will see current financial conditions as excessively tight, nor as a substitute for rate hikes. The primary source of tightening is higher rates, which depend heavily on market expectations of further hikes; this expectation-driven tightening is unlike genuine overheating in the real economy.

Therefore, the FOMC will not halt rate hikes merely because of financial tightening, but will focus on actual inflation and employment data. The key for the October meeting lies in changes to the statement's wording rather than policy action itself. Goldman Sachs expects the FOMC to borrow from Vice Chair Jefferson's recent comments, stating that any further adjustment to the federal funds rate target range, to support a timely return to 2%, will depend on data trends, evolving outlook, and balance of risks; this wording focuses on trend-watching, suggesting a wait for more data between meetings, in line with skipping every other meeting as a compromise.

If Waller thinks this wording is too close to past forward guidance, the alternative is to make no statement on policy outlook, but Goldman Sachs sees the first scenario as more likely. Notably, after a hike in September, Governor Waller said that hikes do not need to occur at consecutive meetings, but should happen within an acceptable time, supporting the cadence of skipping October and hiking in December. Waller gave no hint of a slowdown at the September press conference, and Goldman Sachs expects he may prefer to have others convey this pace, so no major new information is expected from the press conference. The bar to deviate from an every-other-meeting pace before year-end is high, as policymakers' comments support this compromise and the data have yet to indicate an urgent need for action.

Looking forward, the next possible hike would be March, but if the FOMC maintains the every-other-meeting pace through 2027, that would allow time for five more months of inflation data. Goldman Sachs expects no hike in March because the impacts of tariffs, energy shocks, and AI price pressure will fade and the inflation trend will improve. Some FOMC participants may agree with Goldman Sachs that the economy is not overheating and that the inflation overshoot caused by prior supply shocks should be allowed to fade naturally, since the labor cost of offsetting it by tightening monetary policy would be excessive, thereby warranting a smaller overall hiking cycle.

If growth or employment concerns arise–for example, if higher energy prices erode real incomes, consumer spending weakens, or financial conditions tighten beyond current levels–the hiking cycle could end earlier. However, a March hike remains possible if inflation data come in worse than Goldman Sachs expects. Key risks include oil futures exceeding forecasts, an escalation of the Iran conflict triggering more severe and persistent energy shocks, more widespread inflation pressures, and a larger January effect. Goldman Sachs thinks the baseline scenario remains for hikes to end in December, and the market's pricing of four hawkish hikes fails to fully factor in the speed at which these temporary issues may fade. In its October 25, 2026 report, Goldman Sachs stressed that as long as data do not markedly deteriorate, a December hike remains on track, with possible rate cuts to follow.

This judgment is based on a detailed breakdown of inflation dynamics and an accurate assessment of the nature of financial tightening, in sharp contrast to the market's panic-based pricing. More crucially, if the Iran conflict escalates or oil prices surge, Goldman Sachs’ baseline may need adjustment, but based on current information, December as the cycle endpoint is still the most probable scenario.

In summary, the divergence between Goldman Sachs and the market regarding the hiking path is fundamentally rooted in whether the inflation overshoot is viewed as transitory or structural. By dissecting the tariff, energy, and AI factors, Goldman Sachs argues for the reversibility of the 1.1-percentage-point core PCE overshoot, thus supporting the conclusion that the hike cycle will end in December with a terminal rate of 4.00%–4.25%. In contrast, the market's four-hike pricing implies excessive concern about persistent inflation and a misreading of financial tightening. As further data are released at the end of 2026 and early 2027, especially the penultimate inflation reading before the March meeting, this divergence will be tested.

If the temporary factors fade as Goldman Sachs projects, the market faces a repricing risk, and the expected peak rate of 4.55% could be revised down sharply. Conversely, if there is an escalation in the Iran conflict or the January effect is amplified and inflation pressures spread, Goldman Sachs’ dovish path may require revision. For now, however, Goldman Sachs offers a rational alternative perspective, reminding investors to focus on data trends rather than panic sentiment. Following the September hike, this is another moment when the market and policymakers have significantly diverged, and Goldman Sachs’ detailed breakdown provides a valuable reference for understanding the FOMC’s potential logic. Over the coming months, oil prices and tariffs will be two key variables that will determine whether inflation moderates as Goldman Sachs forecasts and whether the FOMC ultimately halts rate hikes after December.