TLDR
- Goldman Sachs anticipates the Federal Reserve will maintain current interest rates throughout the entirety of 2026
- Rate reduction expectations have been pushed to June and December of 2027
- Unexpectedly robust employment figures prompted the revised outlook
- Core PCE inflation projected to remain above 3% during 2026
- Probability of a rate increase doubled from 10% to 20%
Goldman Sachs has significantly adjusted its Federal Reserve policy projections, indicating the central bank will maintain current interest rates until 2027. This represents a notable departure from their previous timeline anticipating reductions beginning in late 2026.
The revised outlook stems from robust U.S. employment data demonstrating continued labor market strength. Chief economist David Mericle noted that these figures eliminate any pressing need for the Fed to implement rate cuts during the current year.
Factors Behind the Revised Projection
Goldman has rescheduled its anticipated rate cuts to June and December 2027, moving away from its previous December 2026 and March 2027 timeline.
Mericle indicated that unemployment levels will probably increase only marginally to 4.4% this year, representing a downward revision from the previous 4.6% forecast. According to his analysis, this unemployment level “falls short of creating sufficient urgency for rate reductions.”
The financial institution highlighted three primary factors sustaining elevated inflation: trade tariffs, elevated oil prices connected to Middle Eastern geopolitical tensions, and what the bank characterizes as exaggerated demand projections related to artificial intelligence development.
Goldman projects these inflationary pressures will maintain year-over-year core PCE inflation beyond 3% throughout 2026. The investment bank anticipates inflation will approach the Federal Reserve’s 2% objective only during 2027.
Mericle emphasized that deeper analysis reveals a more moderate situation than surface-level data indicates. Wage increases are tracking approximately 0.5 percentage points below levels associated with sustained 2% inflation.
Key indicators for rental price growth continue showing weakness, which Goldman interprets as evidence that inflation may moderate once temporary pressures dissipate.
Modest Increase in Rate Hike Probability
While maintaining a more conservative stance on rate reductions, Goldman considers rate increases improbable. Nevertheless, the bank elevated its rate hike probability to 20% from the previous 10% estimate.
Mericle explained that persistent economic expansion and strong employment figures diminish the likelihood that a rate increase would be perceived as a Federal Reserve misstep.
Goldman maintained its terminal rate projection at 3% to 3.25%. The bank suggested that an extended holding period might lead Fed policymakers to determine that current rates are appropriately calibrated.
The bank added that its probability-weighted forecast “remains meaningfully more dovish than market pricing.”
Nomura similarly projected last month that the Federal Reserve would pause throughout 2026, indicating Goldman’s perspective aligns with other major financial institutions.
Based on CME FedWatch tool data, market participants currently assign a 75.5% likelihood to rate increases by year-end, demonstrating widespread market apprehension regarding sustained inflation.
The Federal Reserve has not issued any official response to Goldman’s latest projections.
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