Goldman Sachs shifts second Fed hike forecast to December

Goldman Sachs has delayed its forecast for a second Federal Reserve rate hike from October to December after August core PCE inflation came in near 3%, below expectations.

Summary

• Goldman now expects 3% fourth-quarter core PCE inflation, below the Fed's median forecast of 3.4%.
• The bank sees a strong chance officials will decide another rate increase is unnecessary.
• John Williams favors patience, while Michael Barr continues to support further tightening.
• September's U.S. employment report is scheduled for Oct. 2, ahead of the next Fed meeting.

Goldman Sachs has revised its rate forecast following the September 30 inflation release and comments from New York Fed President John Williams, according to Investing.com's report. The bank still includes a December increase in its forecast, but sees a strong chance the Federal Open Market Committee will conclude that no further hikes are needed.

Goldman Sachs sees core PCE below the Fed's forecast

In the figures cited by Investing.com, August core Personal Consumption Expenditures inflation rose 0.25% from July and 3.01% from a year earlier. Both readings came in below expectations.

For the fourth quarter, the bank now forecasts core PCE inflation of 3% compared with the same quarter of 2025. Its estimate sits 0.4 percentage points below the median 3.4% projection from Fed policymakers.

According to the same account, Goldman attributed part of the lower annual core inflation reading to methodological changes, particularly a revision to the portfolio management component.

Alongside the inflation revisions, Investing.com reported that second-quarter U.S. economic growth was revised upward by 0.7 percentage points to a 2.2% annualized rate, largely because of stronger consumption and investment. The bank nevertheless lowered its third-quarter growth tracking estimate by 0.1 percentage points to 3.3% after the goods trade deficit widened more than expected.

Earlier this month, Goldman had moved in the opposite direction. As crypto.news reported on Sep. 13, the bank backed a September hike after previously expecting the Fed to leave rates unchanged.

At the time, Goldman said the August Consumer Price Index report had barely altered its underlying inflation assessment. Its economists raised their monthly core PCE estimate to 0.26%, while interest-rate futures assigned an 87% probability to a September increase.

In that earlier research, the bank also argued that keeping rates unchanged could provoke a sharp market response because investors had already priced in an increase.

Williams favors waiting while Barr sees more tightening

Before the PCE release, Williams had already challenged expectations for another increase in October. Reuters reported on Sep. 29 that he saw "no urgency" to follow September's move with an immediate second hike.

Williams still considered one additional increase this year his base case, according to Reuters. His comments supported waiting for more data rather than abandoning the possibility of another hike.

During the same day, coverage of Barr's inflation warning recorded CME FedWatch odds for an October quarter-point increase falling from 70.9% on Monday to 49.3% on Tuesday afternoon.

Speaking at the Detroit Economic Club, Barr said inflation risks had increased while risks to employment had eased. He pointed to high energy costs, uncertainty over the Middle East conflict and demand linked to artificial intelligence investment.

On the inflation trend, Barr counted only two months during the previous 20 with readings consistent with 2% core PCE inflation. He said he had yet to see a clear path toward a timely return to target.

"In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."

The governor described U.S. employment as solid, with unemployment at 4.1% and job creation averaging around 80,000 a month this year.

September's Fed hike lifted rates to 3.75%--4%

At its Sep. 16 meeting, the Fed raised rates by 25bps to a target range of 3.75%--4%, delivering its first increase since July 2023.

The committee recorded a unanimous 12--0 vote. In its statement, officials described inflation as elevated and domestic spending as resilient, while noting strong productivity growth and capital investment.

September's economic projections showed 16 of 18 participants expecting at least one additional quarter-point increase before year-end. The median projection placed rates at 4%--4.25% at the end of both 2026 and 2027.

Following the decision, Goldman Sachs Asset Management's fixed-income chief Kay Haigh said a December hike was his team's base case, subject to inflation reports and energy prices.

In a Goldman podcast recorded Sep. 22, former Dallas Fed President Robert Kaplan separately argued that markets might be pricing in too much tightening.

Kaplan favored waiting until December unless inflation data justified earlier action. He described housing and autos as already under strain from higher rates, even as AI infrastructure and defense spending remained strong.

U.S. Bitcoin ETF flows provide context before jobs data

For American crypto investors, September's fund flows provide a separate measure of demand during the changing rate expectations.

A Sep. 28 report on Bitcoin's Iran-linked pullback cited Farside Investors data showing $2.39 billion in net inflows into U.S. spot Bitcoin ETFs during Sep. 21--25. Every trading session recorded positive flows, with BlackRock's IBIT accounting for about $1.16 billion.

Despite those subscriptions, CoinGecko data cited in the report showed Bitcoin falling below $84,000 on Sep. 28 after reaching a seven-day high above $87,000. The report also recorded WTI oil trading above $93 during the early session as traders assessed U.S.-Iran negotiations.

After the Sep. 30 inflation release, Reuters reported that futures markets priced roughly a one-in-three chance of an October increase, while continuing to anticipate a hike by December.

According to the Bureau of Labor Statistics schedule cited in the Sep. 29 report, the September Employment Situation release is due Friday, Oct. 2, at 8:30 a.m. Eastern Time.