TLDR
- Goldman Sachs anticipates the Federal Reserve will maintain current interest rates throughout the entirety of 2026
- Rate reduction expectations have been pushed back to June and December of 2027
- Robust employment figures prompted the revised projection
- Core PCE inflation projected to remain above 3% for all of 2026
- Probability of a rate increase doubled from 10% to 20%
Goldman Sachs has updated its Federal Reserve policy outlook, projecting that interest 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 and continuing into early 2027.
The revision stems from robust U.S. employment data demonstrating continued strength in the labor market. According to Goldman economist David Mericle, these figures eliminate any immediate pressure on the Fed to implement rate reductions during the current year.
Factors Behind the Revised Outlook
Goldman has recalibrated its rate cut timeline to June and December 2027, moving away from its previous forecast of December 2026 and March 2027.
Mericle indicated that unemployment is expected to climb modestly to 4.4% this year, below his prior projection of 4.6%. He emphasized that this level “doesn’t create sufficient pressure to prompt rate reductions.”
The investment bank identified three primary drivers sustaining elevated inflation: trade tariffs, increased oil prices linked to Middle Eastern tensions, and what the bank characterizes as inflated expectations surrounding artificial intelligence demand.
Goldman projects these inflationary forces will maintain year-over-year core PCE inflation above 3% throughout 2026. The firm anticipates inflation will only approach the Federal Reserve’s 2% objective in 2027.
Mericle observed that the fundamental economic picture appears softer than surface-level data indicates. Wage expansion is running approximately 0.5 percentage points beneath the rate associated with sustained 2% inflation.
Forward-looking indicators for rental cost growth continue to show weakness, which Goldman interprets as evidence that inflation could moderate once transitory factors dissipate.
Modest Increase in Rate Hike Probability
While maintaining that rate increases remain improbable, Goldman has elevated its assessment of hike likelihood to 20% from the previous 10%.
Mericle explained that sustained economic growth and employment strength diminish the risk 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 that an extended pause could lead Fed policymakers to determine that current rates are appropriately calibrated.
The investment bank noted that its probability-adjusted forecast “continues to be significantly more accommodative than current market expectations.”
Nomura issued a similar projection last month, anticipating the Fed would maintain its current stance through 2026, indicating Goldman’s view aligns with other major financial institutions.
Based on the CME FedWatch tool, market participants currently place a 75.5% probability on rate increases before year-end, demonstrating widespread concern about continuing inflationary pressures.
The Federal Reserve has not issued any official response to Goldman’s latest forecast.
