TLDR
- Goldman Sachs anticipates the Federal Reserve will maintain current interest rates throughout the entirety of 2026
- Rate reduction expectations have been postponed to June and December of 2027
- Better-than-anticipated employment figures prompted the revised projection
- The bank forecasts core PCE inflation will remain above the 3% threshold during 2026
- Probability of a rate increase has doubled from 10% to 20%
Goldman Sachs has adjusted its projections for Federal Reserve monetary policy, indicating rate cuts won’t materialize until 2027. This represents a significant departure from the bank’s previous timeline, which anticipated reductions beginning in late 2026.
The revision stems from robust employment statistics demonstrating the U.S. labor market’s continued strength. According to Goldman economist David Mericle, these figures eliminate any pressing need for the central bank to reduce rates during the current year.
Factors Behind the Revised Timeline
Goldman has repositioned its rate cut expectations to June and December 2027, moving away from its prior forecast of December 2026 and March 2027.
Mericle projects the unemployment rate will climb only marginally to 4.4% this year, down from his previous 4.6% estimate. He emphasized this level “doesn’t generate sufficient pressure for the Fed to implement rate reductions.”
The investment bank identified three primary factors sustaining inflationary pressure: import tariffs, elevated oil prices connected to tensions in the Middle East, and what the firm characterizes as exaggerated demand projections surrounding artificial intelligence.
Goldman anticipates these elements will maintain year-over-year core PCE inflation beyond 3% throughout 2026. The institution projects inflation won’t approach the Federal Reserve’s 2% objective until 2027.
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 typically associated with sustained 2% inflation.
Forecast indicators for rental growth also continue to register low readings, which Goldman interprets as evidence that inflationary pressures may subside once transitory factors dissipate.
Modest Increase in Rate Hike Probability
While adopting a more conservative stance on rate reductions, Goldman maintains that interest rate increases remain improbable. Nevertheless, the firm has elevated its rate hike probability to 20% from the previous 10%.
Mericle explained that persistent economic strength and employment resilience diminish concerns that a rate hike would be perceived as a misstep by Federal Reserve policymakers.
Goldman maintained its terminal rate projection at 3% to 3.25%. The bank suggested an extended pause might lead Fed officials to determine that current rates are appropriately calibrated.
The firm noted that its probability-weighted forecast “continues to be substantially more dovish than current market pricing.”
Nomura similarly projected last month that the Fed would maintain its current stance through 2026, indicating Goldman’s perspective is shared by other major financial institutions.
Based on the CME FedWatch tool, market participants currently assign a 75.5% likelihood to rate increases by the end of the year, underscoring widespread market apprehension regarding persistent inflation.
The Federal Reserve has not issued any official response to Goldman’s latest forecast revision.
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