The Federal Reserve is expected to hold steady in October, but the rate-hiking cycle is far from over. Goldman Sachs forecasts that December will mark the "final" hike of this round, while cautioning the market against misinterpreting tighter financial conditions as a signal of policy reversal; the FCI has only tightened by 30 basis points, which falls far short of offsetting the impact of rate hikes. Meanwhile, soaring energy prices represent the biggest black swan for the inflation outlook and could directly influence the Fed's policy decision in March 2027.
The Federal Reserve will hold its October policy meeting this week. Goldman Sachs expects the Fed to keep rates unchanged this time, but the hiking cycle is far from over.
According to the ZhiFeng Trading Desk, Goldman Sachs' economic research team noted in its pre‑FOMC meeting report for October that FOMC members' public statements since the last meeting have already pointed to a compromise—raising interest rates once every other meeting. This implies that, following its rate hike in September, the Fed will skip the October meeting but is highly likely to act again in December, completing the second rate increase of this cycle.
It is worth noting that the recent tightening of financial conditions is not sufficient to offset the need for further rate hikes. Goldman Sachs's Financial Conditions Index (FCI) has tightened by about 30 basis points since September, only slightly above the level typically associated with a 25-basis-point hike, and far below the degree of tightening implied by the four rate hikes currently priced into the market.
Goldman Sachs believes that the FOMC is unlikely to view this degree of tightening as excessive, nor as grounds to stop raising interest rates. For investors, this means the market should not misinterpret tighter financial conditions as a signal that the rate-hiking cycle is ending sooner than expected.
No change in October; another rate hike expected in December.
FOMC members' statements following the last meeting have clearly signaled a "bi‑monthly rate hike" pace. According to a Goldman Sachs report, the members indicated they "do not feel an urgent need" for additional rate hikes and that such hikes "need not occur at consecutive meetings, but should be implemented within a reasonable timeframe," as stated by Federal Reserve Governor Waller.
Under this framework, the Federal Reserve just completed a rate hike in September, will skip its October meeting, and is expected to implement a second rate hike in December. Goldman Sachs has characterized this December hike as the "second and final" rate increase of the current cycle.
A key focus of the October meeting will be how the FOMC revises the language in its statement related to the September rate hike. Goldman Sachs believes the committee may adopt wording from Vice Chair Jefferson's recent remarks, stating that "to support a more timely return of inflation to the 2% target, any further adjustments to the federal funds rate target range will depend on data trends, the evolution of the outlook, and the balance of risks." This phrasing suggests the committee is inclined to wait for more data to accumulate between meetings before making a decision.
Goldman Sachs also expects that this press conference will not unveil any major new information. With broad support for a staggered rate-hike schedule, the threshold for deviating from this plan within the year remains high, so the Fed's communication is likely to have only a limited impact on the market. Furthermore, at the September press conference, Wash did not hint at a slower pace, suggesting he may prefer to leave such signals to other committee members.
The tightening of financial conditions has been limited and insufficient to substitute for interest-rate hikes.
The Federal Reserve's hawkish pivot has driven interest rates sharply higher, prompting Goldman Sachs' FCI to tighten noticeably since September—whereas earlier this year the index had remained largely unchanged for most of the period, with higher rates offset by rising stock prices and narrowing credit spreads.
However, the 30-basis-point tightening in the FCI remains modest. Goldman Sachs notes that this magnitude is only slightly above the level typically associated with a single 25-basis-point rate hike, and far below the tightening implied by the market's current pricing of four rate hikes—or even the substantial upward revision in the market's expectations for the federal funds rate terminal rate by 2027 since the beginning of the year.
Goldman Sachs emphasized that this tightening is primarily driven by rising interest rates, which in turn largely depend on market expectations of further rate hikes. Therefore, the FOMC is unlikely to deem the current tightening of financial conditions excessive or capable of replacing additional rate hikes.
Inflation overshooting stems from supply shocks, and Goldman Sachs expects no rate hike in March.
Goldman Sachs estimates that tariffs, the Iranian energy shock, and the mismeasurement of AI price pressures together account for the entire overshoot of core PCE inflation, which currently stands about 1.1 percentage points above the 2% target.
Goldman Sachs expects that, as the impact of the three aforementioned temporary factors gradually fades, inflationary trends will improve markedly by 2027, and therefore does not anticipate the Federal Reserve raising interest rates at its March 2027 meeting. Goldman Sachs also notes that some FOMC members may share a similar view—that the economy is not overheating, and that the inflation overshoot caused by past supply shocks will largely have to run its course naturally, with the employment costs of counteracting it through tighter monetary policy being too high. Members holding this view may be inclined to cap the overall magnitude of this round of rate hikes.
Moreover, if concerns emerge regarding growth or employment—such as rising energy prices eroding real incomes and weighing on consumer spending, or financial conditions tightening more sharply than they currently are—these factors could also prompt an earlier end to the rate-hiking cycle.
Energy is the biggest variable.
Although Goldman Sachs' baseline scenario does not include a March rate hike, the firm explicitly notes that this risk exists.
On the tariff front, Goldman Sachs analysts believe that the incremental pass-through effect of previous rounds of tariffs on consumer prices has largely run its course, and the year-on-year growth rate should continue to decline due to a favorable base effect. Even if the White House replaces the old tariffs overturned by the courts with new ones, the impact would be relatively limited.
In the energy sector, Goldman Sachs estimates that rising oil prices and a widening refined‑product price spread have already pushed core PCE inflation up by about 0.3 percentage points, with an additional increase of 0.1 to 0.15 percentage points under its baseline scenario. However, current oil‑price futures are already above Goldman Sachs's forecasts, largely reflecting market concerns over a further escalation in the Middle East. If oil prices follow the forward curve, they could add roughly 0.1 percentage point to core PCE inflation by March and lift overall inflation by about 0.4 percentage point. This represents the most significant upside risk to Goldman Sachs's inflation outlook.
On the AI price pressure front, Goldman Sachs expects its year-over-year impact on core PCE inflation to peak around the end of 2026, after which it will decline significantly in 2027 as the growth rates of memory and computer prices slow. However, given the irregular monthly impact of memory prices on consumer prices so far this year, some uncertainty remains regarding their effects over the coming months.
Goldman Sachs also warned that if the aforementioned pressures prove more persistent, they could fuel concerns about inflationary spillovers and increase the risk of companies passing on costs by taking advantage of the price‑adjustment window at the start of the year, thereby amplifying the "January effect" and impacting inflation data ahead of the March meeting.
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