Key Takeaways
- Leading banks including Goldman Sachs, JPMorgan, HSBC, and Deutsche Bank have reversed their positions and now anticipate a 25-basis-point rate increase at the upcoming Federal Reserve meeting on Sept. 15-16
- Probability of a rate hike surged to 88-89% following August’s inflation report that exceeded forecasts
- Oil prices breaching the $100 per barrel threshold have intensified worries about persistent inflation
- Equity strategists across Wall Street maintain that 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 hike in a tightening cycle
Leading financial institutions have dramatically revised their Federal Reserve policy predictions before this week’s central bank meeting, with Goldman Sachs, JPMorgan, HSBC, and Deutsche Bank all pivoting to expect a 25-basis-point rate increase.
This dramatic shift in outlook comes on the heels of August inflation figures that exceeded economist expectations and a spike in oil markets, with crude prices climbing beyond $100 per barrel amid growing Middle East geopolitical tensions.
The probability of monetary tightening at the Federal Reserve’s two-day gathering on Sept. 15-16 has jumped to approximately 88-89%, a significant increase from the 67-70% probability observed prior to last week’s Consumer Price Index release. The central bank has maintained its current interest rate level throughout this year following a quarter-point reduction at the close of 2025.
Goldman Sachs’ Dramatic Policy Reversal
This represents a dramatic 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 moderating employment and inflation figures made any pivot toward higher rates difficult to rationalize.
During that period, CME FedWatch probabilities indicated only a 30% chance of a September move. Goldman’s primary forecast anticipated continued disinflationary trends rather than a rebound in price pressures.
The firm has now issued analysis positioning the anticipated rate increase as a reaction to evolving market conditions. Goldman continues to project two Federal Reserve rate reductions in 2027, albeit on a delayed schedule compared to previous estimates.
HSBC economist Ryan Wang articulated the situation succinctly: “Lack of inflation progress has tipped the balance.”
JPMorgan has adjusted its long-term neutral rate projection upward to 3.25%. The bank’s economic team characterized recent days as featuring “rising bond yields and energy prices and a firm enough set of inflation readings” that make monetary tightening more probable than not.
Implications for Equity Markets
Notwithstanding expectations for tighter monetary policy, equity strategists across Wall Street generally anticipate the bull market will continue. Goldman Sachs strategists under Ben Snider’s leadership emphasized that corporate earnings, rather than interest rates, continue to be the primary determinant of stock performance.
The S&P 500’s forward price-to-earnings multiple has contracted from 22 at year-start to 19, despite the benchmark index trading within 2% of its all-time peak.
Looking at historical patterns, the S&P 500 typically experiences an average 2% decline during the three-month period following an initial rate hike in a tightening cycle, but delivers 9% gains over the subsequent twelve months.
Morgan Stanley strategists projected that high-quality equities are positioned to outperform should the Fed proceed with the anticipated increase. Their analysis indicates that cyclical sectors and momentum-driven stocks have traditionally outpaced broader market returns around the commencement of tightening cycles.
JPMorgan’s view is that a limited hiking cycle should prove digestible for equity markets. The primary downside risk, according to the bank, would be renewed acceleration in inflation necessitating a more extensive series of rate increases.
Morgan Stanley has identified the most significant near-term threat as a sharp escalation in petroleum prices linked to potential closure of the Strait of Hormuz, a scenario that could transform a modest policy recalibration into an extended tightening campaign.
The Federal Reserve’s policy deliberations conclude Wednesday.
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