Goldman Sachs has added a third quarter-point Federal Reserve rate hike to its forecast for March 2027, after an October inflation report that surprised sharply to the upside for a third straight month.
October core CPI rose 0.30%, above economists' expectations, with Goldman estimating that residual seasonality tied to last year's government shutdown added 5 basis points. The report showed upside across several categories that appeared to reflect more than just the most direct effects of higher oil prices, according to David Mericle, chief U.S. economist at Goldman Sachs.
Goldman still expects a second 25-basis-point hike in December. With a third in March, the federal funds rate would peak at 4.25% to 4.5%.
A third hike could come as early as January, Mericle said, since the Fed doesn't have to stick to its every-other-meeting pace. But the economist sees March as a bit more likely, because he expects softer November and December inflation data, followed by larger start-of-year price increases that Goldman calls the January effect.
Recent prints will probably lead most Fed officials to signal a third hike in the December dot plot, which would require only two more participants to raise their forecasts, Mericle noted. A firmer January report would make delivering it the path of least resistance, even if the energy shock appears over by then, he added.
Fed Governor Christopher Waller said earlier Tuesday, before the report, that a 50-basis-point December hike should be considered if October core CPI came in around 0.3% or higher. Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take, he said. Goldman still expects 25 basis points, since it suspects most voters would hesitate to jump to 50.
Oil futures have fallen substantially since the elections, which Mericle said should mean most of the energy shock's passthrough to consumer prices is behind. He remains confident inflation will be meaningfully lower by the end of 2027 as tariff, energy and AI-related price pressures fade.
Goldman kept its eventual terminal rate forecast at 3.25% to 3.5% but now expects cuts to begin a quarter later, in December 2027, followed by cuts in March, June and September 2028.
Key Points
- Third hike added: Goldman now forecasts a third quarter-point rate hike in March 2027, bringing the peak federal funds rate to 4.25%-4.5%. This affects interest-rate-sensitive sectors such as banking, real estate, and consumer discretionary.
- Inflation breadth: October core CPI rose 0.30%, with upside across multiple categories beyond energy, indicating broader price pressures that could impact input costs for manufacturers and retailers.
- Timing uncertainty: A third hike could come as early as January, but March is seen as more likely due to expected softer inflation in November and December and the January effect. This uncertainty affects bond markets and rate-sensitive equities.
Risks and Uncertainties
- Residual seasonality: Goldman estimates that residual seasonality from last year's government shutdown added 5 basis points to the October core CPI, which could distort the inflation signal. This uncertainty affects the reliability of inflation data and Fed decision-making, impacting all sectors.
- Energy shock passthrough: While oil futures have fallen since the elections, Mericle expects most of the energy shock's passthrough to consumer prices is behind. However, if energy prices rebound, inflation could surprise again, affecting energy-intensive sectors and consumer spending.
- Fed credibility: Fed Governor Waller warned that hiking only 25 basis points would put credibility at risk, suggesting a potential for a larger 50-basis-point hike. This uncertainty could lead to market volatility, particularly in rate-sensitive sectors like financials and housing.