The Zhitong Finance App learned that the higher-than-expected US CPI data for October released on Tuesday prompted Goldman Sachs to adjust its previous forecast that the current round of the Fed's interest rate hike cycle will end in December. The Wall Street financial giant now predicts that the Federal Reserve will raise interest rates by another 25 basis points in March next year.
The overall and core CPI monthly rates of the US in October were higher than market expectations, indicating that price pressure is still high, strengthening the reasons for the Federal Reserve to continue to raise interest rates. According to data released by the US Department of Labor (BLS) on Tuesday, the US CPI rose 0.4% month-on-month, higher than market expectations of 0.3%, and the previous value was 0.6%; excluding volatile projects such as energy and food, the core CPI rose 0.3% month-on-month, higher than market expectations of 0.2%. The previous value was 0.3% (CPI and core CPI for October had no year-on-year data due to the shutdown of the US federal government in October last year).
This CPI data is the last CPI data before the Federal Reserve's December 8-9 interest rate meeting (the November CPI is scheduled to be announced on December 10, the day after the resolution, and the year-on-year standard will resume at that time). In October, which was announced last week, 165,000 new jobs were added, far exceeding expectations. The unemployment rate fell to 4.1%. Combined with the fact that core inflation has not cooled down, the market focus has turned to whether the December rate hike was 25 or 50 basis points.
After the release of the US CPI data for October, the market raised its bet on the Fed's interest rate hike. In addition to the almost 100% pricing that the Federal Reserve will raise interest rates in December, the market has raised the bet that the Fed will raise interest rates by 50 basis points next month, and further increased the bet that the Fed will raise interest rates at least twice by mid-2027.
Goldman Sachs is the first agency in the industry to adjust forecasts. Goldman Sachs believes that compared to January next year, it is more likely that the Federal Reserve will raise interest rates again in March next year. The forecast predicts that inflation will fall somewhat before the end of this year, but as seasonal price pressure reappears early next year, and costs remain high, inflation is likely to rise again.
David Mericle, chief US economist at Goldman Sachs, said, “By the time of the March meeting next year, and possibly even the January meeting, the energy shock may have basically passed. But we doubt that recent inflation data will prompt most members of the Federal Open Market Committee (FOMC) to signal a third rate hike in the bitmap released in December.”
Furthermore, Goldman Sachs currently anticipates that the Federal Reserve will start cutting interest rates in December 2027, three months later than previously forecast. Goldman Sachs also anticipates that the Federal Reserve will cut interest rates further in March, June, and September 2028 thereafter.
It is worth mentioning that the latest October CPI data just hit the threshold for a sharp interest rate hike just mentioned by Federal Reserve Governor Waller on Tuesday. Waller said on Tuesday that he supports raising interest rates in December and warned that if inflation continues to accelerate, he will support a 50 basis point increase to preserve the Federal Reserve's credibility.
Waller said that despite a strong economy and a stable labor market, inflation is still too high. Waller said, “If inflation improves month-on-month in October, as I expected, I am inclined to support raising the policy interest rate by 25 basis points.” “But if the October CPI data released later today is similar to the previous two months' readings — core CPI inflation is around 0.3% or higher — then stronger policy action may be needed. In this case, I think a 50 basis point increase in interest rates should be considered at the December meeting.” Waller's blunt statement is the strongest signal from Fed officials so far — not only do policymakers need to raise interest rates in December, but the rate increase may exceed market expectations by 25 basis points.
In an interview on Tuesday, the 2027 FOMC voting committee and Chicago Federal Reserve Chairman Austin Goulsby described the latest inflation report as “disturbing; it can almost be said that overheated inflation is very disturbing.” What he is most worried about is that tariffs and energy shocks have been slow to fully subside, and service inflation continues to be high. However, he did not clearly support the 50 basis point rate hike in December, but instead emphasized that no policy options could be ruled out ahead of time.
Philadelphia Federal Reserve Chairman Anna Paulson is more cautious in comparison. She supports increasing interest rates at a gradual pace, saying “as far as the present is concerned, it is appropriate to continue to gradually tighten the policy.” At the same time, she mentioned that upward pressure on wages is still limited, and inflation expectations are still in line with the central bank's 2% inflation target.
Paulson said, “Skipping a rate hike only adjusts the pace of interest rate hikes, not a shift. There is probably still room for austerity in the future. “However, when conditions permit, I prefer gradual tightening,” she further explained. Slowing down the pace of interest rate hikes can allow households, businesses, and the financial sector to cushion adjustments, and also make it easier for policy makers to continuously evaluate economic data. She said, “The gradual approach works best when the policy direction is fully understood by the market. If the market already anticipates more austerity, a gradual rate hike will not let us lag behind our policy goals.”