TLDR
- Goldman Sachs anticipates the Federal Reserve will maintain current interest rates throughout 2026
- Rate reductions now projected for June and December 2027
- Robust employment data prompted the forecast revision
- Core PCE inflation expected to remain above 3% during 2026
- Probability of rate increase raised to 20% from previous 10%
Goldman Sachs has updated its projection for Federal Reserve monetary policy, indicating the central bank will delay interest rate reductions until 2027. This represents a departure from the bank’s prior expectations for cuts beginning in late 2026 and continuing into early 2027.
The revised outlook follows unexpectedly strong employment figures demonstrating continued labor market strength. According to Goldman economist David Mericle, these numbers eliminate any immediate pressure on the Fed to reduce rates in the near term.
Factors Behind the Revised Timeline
Goldman has repositioned its rate cut expectations to June and December 2027, moving away from its previous projection of December 2026 and March 2027.
Mericle indicated that unemployment is likely to climb moderately to 4.4% this year, below his prior forecast of 4.6%. According to him, this level falls short of creating sufficient pressure for the Fed to implement rate cuts.
The financial institution identified three primary drivers sustaining elevated inflation: tariff policies, elevated oil prices connected to Middle Eastern tensions, and what it characterizes as inflated demand expectations surrounding artificial intelligence.
These inflationary pressures are projected to maintain year-over-year core PCE inflation beyond 3% throughout 2026. Goldman anticipates inflation will only approach the Federal Reserve’s 2% objective in 2027.
Mericle observed that beneath the surface, economic conditions appear more subdued than headline figures indicate. Wage increases are tracking approximately half a percentage point below levels consistent with sustainable 2% inflation.
Forward-looking indicators for rental price growth also show restraint, which Goldman interprets as evidence that inflation may moderate once transitory factors dissipate.
Modest Increase in Rate Hike Probability
While maintaining a cautious stance on rate reductions, Goldman acknowledges that rate increases remain improbable. Nevertheless, the bank has elevated its probability assessment for a hike to 20%, doubling its previous 10% estimate.
Mericle explained that persistent strength in growth and employment metrics diminish concerns that a rate increase would be perceived as a policy error by Federal Reserve officials.
Goldman maintained its terminal rate projection at 3% to 3.25%. The bank suggested an extended pause might lead Fed policymakers to determine current rates are appropriately calibrated.
The bank noted that its probability-weighted outlook “remains meaningfully more dovish than market pricing.”
Nomura similarly projected last month that the Fed would maintain its current stance through 2026, indicating Goldman’s perspective aligns with other major financial institutions.
Based on the CME FedWatch tool, market participants currently assign a 75.5% probability to rate increases by year-end, demonstrating widespread concern regarding sustained inflation.
The Federal Reserve has not issued any official response to Goldman’s updated forecast.
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