TLDR
- Goldman Sachs anticipates the Federal Reserve will maintain current rates throughout 2026
- Rate reductions now projected for June and December 2027
- Robust employment report triggered the revised timeline
- Core PCE inflation projected to remain above 3% during 2026
- Probability of rate increase doubled from 10% to 20%
Goldman Sachs has updated its Federal Reserve projections, indicating the central bank will maintain current interest rates until 2027. This represents a significant shift from the bank’s prior expectations of cuts beginning in late 2026 and early 2027.
The revised outlook stems from robust U.S. employment data demonstrating continued labor market strength. David Mericle, Goldman’s chief economist, stated the figures eliminate any immediate pressure on the Fed to reduce rates in the near term.
Factors Behind the Revised Projection
Goldman has recalibrated its rate cut expectations to June and December 2027, moving away from its previous December 2026 and March 2027 timeline.
Mericle projects the unemployment rate will climb modestly to 4.4% this year, down from his earlier 4.6% forecast. He emphasized this level falls short of creating sufficient pressure for the Fed to ease monetary policy.
The investment bank identified three primary drivers sustaining elevated inflation: trade tariffs, increased oil prices connected to Middle Eastern tensions, and what the bank characterizes as excessive optimism surrounding artificial intelligence demand.
Goldman anticipates these inflationary forces will maintain year-over-year core PCE inflation beyond 3% throughout 2026. The bank projects inflation will approach the Fed’s 2% objective only after 2027 begins.
Mericle observed that beneath the surface, economic indicators appear weaker than headline figures indicate. Wage increases are running approximately 0.5 percentage points below levels consistent with sustained 2% inflation.
Forward-looking indicators for rental inflation also show subdued growth, which Goldman interprets as evidence that inflation pressures may diminish once transitory factors dissipate.
Modest Increase in Rate Hike Probability
While maintaining a cautious stance on rate reductions, Goldman suggests rate increases remain improbable. Nevertheless, the bank has doubled its rate hike probability to 20% from 10%.
Mericle explained that sustained economic growth and employment strength 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 an extended pause might lead Fed policymakers to determine current rates are appropriately calibrated.
The bank noted that its probability-weighted projection “remains meaningfully more dovish than market pricing.”
Nomura previously issued a similar forecast last month, projecting the Fed would maintain rates through 2026, indicating Goldman’s perspective has support among other major institutions.
Based on the CME FedWatch tool, market participants currently assign a 75.5% probability to rate increases by year-end, demonstrating widespread concern about continuing inflation.
The Federal Reserve has issued no official response to Goldman’s updated forecast.
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