Goldman Sachs has pushed back its forecast for a second Federal Reserve rate hike from October to December, following lower-than-expected inflation readings in August.
August core Personal Consumption Expenditures inflation rose 0.25% from July and 3.01% from a year earlier, both readings below forecasts. Goldman now expects fourth-quarter core PCE inflation of 3%, which is 0.4 percentage points below the median forecast from Fed policymakers.
The bank still expects a December rate increase but now sees a strong chance that Fed officials will decide no more hikes are needed beyond that.
Mixed Signals from Fed Officials
Fed policymakers remain divided on the path forward. New York Fed President John Williams said on September 29 that he saw "no urgency" for an immediate second hike, though he still expects one more increase this year as his base case.
Fed Governor Michael Barr took a more hawkish stance, noting that only two of the past 20 months showed core PCE inflation readings in line with the 2% target. He cited high energy costs, the Middle East conflict, and demand tied to AI investment as inflation risks. Barr stated that "further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."
He described employment as solid, with unemployment at 4.1% and job growth averaging about 80,000 a month this year.
Market Expectations Shift
CME FedWatch odds for an October quarter-point hike fell from 70.9% on Monday to 49.3% on Tuesday afternoon. After the September 30 inflation release, futures markets priced about a one-in-three chance of an October hike, though markets still expect a hike by December.
The Federal Reserve raised rates by 25 basis points on September 16 to a range of 3.75% to 4%, with a unanimous 12-0 vote. This was the first increase since July 2023.
Sixteen of 18 Fed participants expected at least one more quarter-point hike before year-end, according to projections released following the September meeting.
Upcoming Economic Data
The September jobs report from the Bureau of Labor Statistics is scheduled for Friday, October 2, at 8:30 a.m. Eastern Time. This report could influence Fed decision-making heading into the final months of 2024.
