Goldman Pushes Next Fed Hike to December, Sees Cycle Near Peak

Goldman Sachs pushed its forecast for the next 25 basis point Federal Reserve rate hike to December from October on Thursday, saying there is a strong chance the FOMC concludes no further tightening is needed. The shift followed August PCE inflation of 3.4% year over year against 3.7% expected, with core PCE running near 3%. CME FedWatch put October hike odds below 40%, down from roughly 70% a week earlier, while the US 2-year Treasury yield posted its biggest one-day fall in more than a year.

Context — why the December call matters now

Goldman had expected a quarter-point rise at the October meeting, which would have followed the Fed's September increase, its first since 2023. The bank changed that view after the inflation data landed soft and after New York Fed President John Williams made remarks it read as dovish. The revision collapses two consecutive hikes into one, and raises the possibility of none at all.

The backdrop is a Fed that has already delivered one increase in September, leaving officials to decide whether the economy still needs restraint. Chair Kevin Warsh has favoured giving markets less information about how the central bank will react to incoming data, a communication style Goldman flagged as a concern.

Inflation itself is cooling faster than the Fed's own projections. Goldman forecasts core PCE at 3.0% on a fourth-quarter basis, below the 3.4% median projection of FOMC participants. That gap is the core of the bank's argument: if its forecast is right, the committee's own framework implies less tightening, not more.

Growth revisions cut the other way. Second-quarter GDP was revised up to 2.2% annualised and first-quarter growth to 2.5%, while Goldman trimmed its third-quarter tracking estimate slightly to 3.3%. An economy running above trend is not the usual backdrop for ending a hiking cycle.

Market pricing has already repriced the path. The probability of an October move fell below 40% after the inflation report, from around 50% beforehand and about 70% a week earlier, according to CME FedWatch data.

Data — what the numbers show

The inflation surprise is the anchor. Headline PCE at 3.4% year over year came in three tenths below the 3.7% consensus. Core PCE, which strips out food and energy, rose about 0.25% on the month, also below expectations, for an annual rate near 3%.

Metric	Report / Actual	Prior or Expected
August PCE y/y	3.4%	3.7% expected
Core PCE m/m	~0.25%	below expectations
Q4 core PCE (Goldman)	3.0%	3.4% FOMC median
October hike odds	below 40%	~70% a week earlier
2-year yield	biggest one-day fall in over a year	—
10-year yield	highest since 2002	—

Goldman's growth tracking moved in the opposite direction from inflation. Q2 GDP was revised to 2.2% annualised and Q1 to 2.5%, with the bank's Q3 estimate trimmed slightly to 3.3%.

The peer comparison sits in the rates market. The 2-year yield, the maturity most sensitive to Fed policy, posted its largest single-day decline in more than a year on Thursday, while the 10-year touched its highest level since 2002. That divergence — short end rallying, long end pinned near multi-decade highs — is the defining feature of the current curve.

Oil is the outlier input. Brent is back above $100 on China's fuel export halt and US troop deployments tied to the Iran war, a level that feeds directly into headline inflation and complicates any dovish read.

Analysis — what it means for markets and sectors

The first-order effect lands on the dollar and the front end of the curve. A softer Fed path takes support away from the US dollar, and the 2-year rally shows traders already positioning for fewer hikes. Rate-sensitive sectors — housing, utilities, small caps — are the natural beneficiaries of lower front-end yields.

The counter-argument is the long end. With 10-year yields near 2002 highs, a gentler Fed path may do more to steepen the curve than to ease broader financial conditions. Mortgage rates and corporate borrowing costs track the long end, so a steeper curve can leave credit conditions tight even as hike expectations fade.

Fed officials are openly split. Minneapolis Fed President Neel Kashkari said Thursday he expects further increases will be needed to restrain the economy into 2027, though he is unsure whether the next move should come this month. Governor Lisa Cook, speaking alongside Williams, said supply shocks have proved surprisingly persistent and that the AI investment boom is already adding to inflation pressure.

Those two views frame the positioning divide. Kashkari's camp keeps hike odds alive; Goldman's call aligns with the short-end buyers. Flow is moving toward the front end of the curve and away from dollar longs, with oil the main wildcard that could reverse it.

The risk to Goldman's call is energy. A renewed inflation pickup driven by Brent above $100 could quickly revive October hike pricing, and the bank's own forecast would not survive a sustained move higher in crude.

Outlook — what to watch next

Friday's September payrolls report is the immediate catalyst. A strong print would push hike odds back up regardless of Goldman's view, and would test whether the soft PCE reading was signal or noise.

The next FOMC decision is the October meeting, where the December call either holds or breaks. Between now and then, watch core PCE prints for confirmation of Goldman's 3.0% Q4 forecast, and watch Brent for any move that reopens the energy-inflation channel.

Levels matter here. The 2-year yield's post-PCE slide is the market's vote on fewer hikes; a reversal above pre-report levels would undercut the December thesis. The 10-year near 2002 highs is the constraint — if it keeps rising, the curve steepens further and financial conditions stay tight no matter what the Fed does.

Frequently Asked Questions

What does Goldman's December call mean for retail investors?

It signals that the market's expected path of rate hikes has shortened, which typically supports shorter-duration bonds and rate-sensitive equities while weighing on the dollar. Retail investors holding cash or short-term Treasuries may see yields stabilize rather than climb. The call is a forecast, not a Fed decision, and Friday's payrolls report could change the odds quickly.

Why did October Fed hike odds fall below 40%?

CME FedWatch data showed the probability dropping below 40% after August PCE inflation came in at 3.4% year over year versus 3.7% expected. That was down from around 50% beforehand and about 70% a week earlier. Softer core PCE and dovish remarks from New York Fed President John Williams reinforced the repricing, alongside Goldman's shift to a December call.

What is the biggest risk to Goldman's forecast?

Oil. Brent is back above $100 on China's fuel export halt and US troop deployments tied to the Iran war. A sustained energy-driven inflation pickup would feed into headline PCE and could revive October hike pricing, undoing the short-end Treasury rally. Fed officials including Neel Kashkari and Lisa Cook have also flagged persistent supply shocks and AI-driven inflation pressure.

Bottom Line

Goldman's December call hinges on Friday's payrolls and Brent staying below the level that revives October hike pricing.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.