Key Takeaways
- Four major financial institutionsāGoldman Sachs, JPMorgan, HSBC, and Deutsche Bankānow anticipate a 25 basis point rate increase at the Federal Reserve’s Sept. 15-16 policy meeting
- Probability of a rate hike surged to 88-89% following August inflation figures that exceeded expectations
- Oil prices breached the $100 per barrel threshold, intensifying inflationary pressures
- Leading strategists maintain the ongoing bull market can withstand monetary tightening provided corporate earnings stay robust
- Historical data shows the S&P 500 typically gains 9% in the year following an initial rate increase in a tightening cycle
Leading financial institutions have reversed their positions before this week’s Federal Reserve policy announcement, with Goldman Sachs, JPMorgan, HSBC, and Deutsche Bank now projecting a 25 basis point interest rate hike.
This dramatic change comes on the heels of August inflation figures that ran hotter than anticipated and a spike in crude oil valuations beyond $100 per barrel, fueled by heightened geopolitical tensions in the Middle East region.
The probability of a rate increase at the upcoming Sept. 15-16 policy session jumped to approximately 88-89%, a significant rise from the 67-70% likelihood registered prior to last week’s inflation report. The Federal Reserve has maintained rates at current levels throughout the year following a 25 basis point reduction at the close of 2025.
Goldman Sachs’ Dramatic Pivot
This represents a significant about-face for Goldman Sachs. Just a month ago, the investment bank characterized a September rate increase as “very unlikely.” Chief economist Jan Hatzius had maintained that consecutive months of weaker employment and inflation metrics made any pivot toward tightening difficult to rationalize.
During that period, CME FedWatch tools indicated approximately 30% odds for a September move. Goldman’s primary scenario anticipated continued inflation improvement rather than a reversal.
The bank has now issued research positioning the anticipated hike as a reaction to current market conditions. Goldman continues to project two Fed rate reductions in 2027, albeit with adjusted timing from its previous forecast.
HSBC economist Ryan Wang summarized the situation succinctly: “Lack of inflation progress has tipped the balance.”
JPMorgan elevated its projection for the terminal policy rate to 3.25%. The bank’s economic team characterized the preceding week as one featuring “rising bond yields and energy prices and a firm enough set of inflation readings” to make a hike more probable than not.
Implications for Equity Markets
Notwithstanding the rate hike projections, Wall Street analysts generally anticipate the bull market will maintain momentum. Goldman Sachs strategists under Ben Snider’s leadership emphasized that corporate earnings, rather than interest rates, continue to be the primary catalyst for equity performance.
The S&P 500’s forward price-to-earnings multiple has contracted from 22 at year’s start to 19, despite the benchmark index trading within 2% of its all-time peak.
Looking at past cycles, the S&P 500 has typically declined roughly 2% on average during the three-month period following an initial rate hike, but has posted 9% gains over the subsequent 12-month timeframe.
Morgan Stanley strategists indicated that high-quality equities are positioned to outperform should the Fed proceed with the expected increase. They observed that cyclical and momentum stocks have traditionally outpaced broader markets surrounding the inaugural hike of a tightening phase.
JPMorgan suggested a limited hiking cycle should prove digestible for equity markets. The primary concern, according to the bank, would be renewed inflation acceleration necessitating a more extensive series of rate increases.
The most pressing near-term vulnerability identified by Morgan Stanley involves a potential sharp escalation in oil prices linked to a blockage of the Strait of Hormuz, which could transform a modest policy recalibration into an extended tightening campaign.
The Federal Reserve’s two-day policy deliberation concludes on Wednesday.
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