Goldman Sachs has changed its forecast for the Federal Reserve and now expects the central bank to raise interest rates by 25 basis points when its September meeting ends.
The Federal Open Market Committee (FOMC) will announce its decision on Sept. 16 at 2 p.m. Eastern Time, followed by a press conference at 2:30 p.m. If the Fed raises rates by a quarter point, the federal funds target range would move from 3.50%–3.75% to 3.75%–4.00%.
Goldman Sachs previously expected the Fed to leave rates unchanged. The bank changed its view after the latest U.S. inflation report and a sharp rise in market expectations for a rate hike. Interest-rate futures now show an 87% chance of a September increase, up from 72% a day earlier. Markets also put the chance of at least one rate increase by the end of the year at 97%.
Goldman said the August inflation report did not significantly change its overall view of inflation. The bank only slightly raised its forecast for monthly core PCE inflation to 0.26%. However, Goldman believes leaving rates unchanged could surprise markets because investors are already heavily expecting a rate increase.
The August inflation numbers sent mixed signals. Consumer prices rose 0.4% during the month, while annual headline inflation stayed at 3.4%, the same as in July.
Core CPI, which removes food and energy prices, increased 0.3% in August. On a yearly basis, core inflation fell from 2.5% to 2.4%, its lowest level in five years.
Energy prices remained a major source of pressure. Energy costs were up 16.3% from a year earlier, while food prices increased 2.7%. Several service categories, including communication services, hotels, airline fares and education, also recorded monthly increases. Medical care and motor vehicle insurance prices fell.
KPMG chief economist Diane Swonk said the service data could still be a concern for the Fed. She estimated that services outside housing increased 0.5% in August and were up 3% from a year earlier.
Swonk expects August headline PCE inflation to rise 0.4% for the month and core PCE to increase 0.3%. Her forecast would put the yearly rates at 3.8% and 3.4%, respectively. However, the official August PCE data had not been released yet.
Not everyone agrees that higher rates are needed. James Thorne, chief market strategist at Wellington-Altus, questioned whether the latest data actually justified Goldman’s change in forecast.
Thorne argued that the move may have more to do with market expectations than a major change in inflation. He also pointed to 3.1% annual wage growth and said he did not see clear evidence of a wage-price spiral.
Swonk has a different view. She expects three rate increases by early 2027 and said the August inflation report could increase the chances of a unanimous rate hike in September.
The Fed focuses on the PCE price index when targeting its 2% inflation goal, rather than CPI. This difference is important because core CPI fell to 2.4%, while Swonk’s forecast puts core PCE inflation at 3.4%.
Bitcoin also remained under pressure as expectations for higher interest rates increased. The cryptocurrency was trading around $77,000 on Sept. 13, after moving between roughly $76,500 and $77,400. It remained below the $80,000 level as traders waited for the Fed decision.
Bitcoin briefly moved back above $78,000 after the inflation report, while rate-hike expectations increased. Earlier in September, Bitcoin had been trading closer to $79,500 as investors prepared for several major U.S. economic events, including producer inflation, consumer inflation and the FOMC meeting.
Higher interest rates can affect Bitcoin because they can make lower-risk investments more attractive and influence Treasury yields and the U.S. dollar. However, Bitcoin’s daily moves can be driven by many factors, so it is difficult to blame any single price move entirely on Fed expectations.
The FOMC meeting will begin on Sept. 15 and end on Sept. 16. Along with the rate decision, the Fed will release updated economic projections covering inflation, unemployment, economic growth and future interest rates.
Markets will pay close attention to the Fed’s statement and Chair Kevin Warsh’s press conference. Investors will be looking for clues about whether a September rate increase would be a one-time move or the beginning of a longer series of hikes.
The Fed’s projections are not promises and can change as new economic data arrives. The final decision will be released at 2 p.m. Eastern Time on Sept. 16, with the press conference starting 30 minutes later.
