Goldman Sachs has aligned with Wall Street's increasingly hawkish stance, incorporating a September rate hike into its baseline forecast. Following the release of August CPI data, major investment banks have largely reached a consensus on a rate increase next week, though their outlooks on the subsequent policy path diverge significantly.

In a research note dated September 11, Goldman Sachs Chief U.S. Economist David Mericle stated clearly that the firm now expects the Fed to raise rates by 25 basis points at the conclusion of its two-day meeting on September 16, a shift from its earlier call for no action. This change was directly triggered by the latest U.S. August CPI report, which showed core CPI rising 0.3% month-over-month, exceeding the 0.2% market expectation and pushing the probability of a September hike to roughly 90% in market pricing.

Notably, this adjustment by Goldman Sachs does not stem from a fundamental reassessment of the inflation landscape, but rather from considerations regarding the Fed's credibility. Mericle acknowledged, "The August CPI report only nudged our forecast for August core PCE slightly higher to 0.26%, and it did not change our underlying view on inflation. However, we believe that with market pricing already reflecting nearly a 90% probability of a hike, the Fed will be reluctant to risk market turmoil by holding rates steady." Currently, market pricing for next week's increase stands at approximately 85%.

The Rationale Behind Goldman's Shift: Credibility Concerns Outweigh Economic Assessment

The report reveals an unusual logic behind Goldman's forecast revision. The firm explicitly states that, from an economic fundamentals perspective, it does not see a compelling case for an immediate rate increase.

Mericle noted in the report that Goldman still attributes the portion of inflation exceeding the 2% target entirely to one-off factors, the effects of which are expected to gradually fade. The improvement in core PCE inflation to an annualized rate of around 2.5% over the past three months serves as an early signal supporting this view.

Furthermore, Goldman believes the economy is not currently overheating, and inflation expectations are not at immediate risk of becoming unanchored. The firm also argues that a limited rate hike would have minimal impact in offsetting the inflationary effects of supply shocks.

However, what ultimately drove Goldman's pivot was its assessment of the Fed's communication credibility. The report points out that Fed Chair Warsh's hawkish remarks at the Jackson Hole symposium steered market expectations toward the notion that "if inflation data is not perfect, a hike will follow." While the August CPI reading was not alarming, it was indeed "not perfect." In this context, the report argues that if the Fed chooses to hold steady, it could undermine market confidence in the credibility of its policy framework and trigger an immediate reaction in long-end yields.

Goldman also noted that recent oil price increases may push some previously undecided FOMC voters toward supporting a hike. Even those committee members who share Goldman's inflation assessment might choose not to oppose an increase, having grown weary of repeatedly explaining that "high inflation is not a signal of an overheating economy."

Wall Street's Collective Turn: September Hike Becomes Consensus

Goldman Sachs is not alone in this shift. Following the release of the August CPI data, numerous major Wall Street institutions quickly revised their Fed rate forecasts, with a September hike increasingly becoming the baseline scenario for many firms.

JPMorgan abandoned its earlier more cautious stance, adjusting its forecast to include 25 basis point hikes in both September and December. Chief U.S. Economist Michael Feroli stated that the case for a hike is straightforward: core PCE inflation has exceeded 3% every month this year, and recent progress toward the 2% target has been extremely limited.

Citigroup economists Andrew Hollenhorst and Veronica Clark expect a 25 basis point hike in September, arguing that higher-than-expected core inflation combined with resurgent energy prices "may well be just enough to forge a consensus." MUFG has also completely abandoned its previous projection of holding rates steady through 2026, now expecting a 25 basis point increase in September.

Beyond the Consensus: Notable Divergence on the Path Ahead

While a September hike has become Wall Street consensus, institutions show clear divergence in their assessments of the policy trajectory beyond that.

Regarding the path after September, Goldman's position is relatively cautious. Mericle believes that further hikes at subsequent meetings are possible, though not part of the baseline forecast.

Goldman suggests that most FOMC members may lean against raising rates again at the October meeting, partly because it coincides with the midterm elections and partly because members skeptical of the need for a hike may prefer to keep the tightening pace more gradual. As for December, Goldman expects inflation trends to improve further by then, with the impact of key inflation drivers such as tariffs and the Iran conflict also diminishing, significantly reducing the necessity of another increase.

Goldman also points out that even a single 25 basis point hike would have a fairly limited impact on the real economy.

TD Securities holds the most hawkish stance. Strategists including Oscar Munoz and Gennadiy Goldberg expect the Fed to initiate a rate hike cycle in September, with a total of three increases, one each in September and October, followed by a third in January 2027. They argue that the August CPI data shows a lack of further inflation improvement, necessitating a new round of tightening.

JPMorgan, meanwhile, expects two hikes this year but does not anticipate the Fed acting at every consecutive meeting. Feroli sees reasonable grounds for a pause in October, allowing time to observe how the hikes transmit through the economy. The bank's baseline path is: a hike in September, a pause in October, and another increase in December, without expecting the cycle to extend into 2027.

MUFG's projected path falls between the two. The firm expects a September hike followed by an October pause, with a 55% to 60% probability of another increase in December. Notably, MUFG explicitly identifies the possibility that this hike could itself constitute a "policy error," and has raised its yield forecasts for most Treasury maturities by 25 to 50 basis points, projecting a year-end 2-year yield of 4.25%, a 10-year yield of 4.625%, and a 30-year yield of 5%.

Citigroup presents the most dovish forecast. The firm expects the Fed to hold steady after a September hike until June 2027, at which point it would begin cutting rates as inflation gradually subsides, with a total of three cuts before the end of 2027.