Goldman Sachs believes a 25 bps hike could come as soon as the October policy meeting given the hawkish tone of the latest FOMC policy statement.
- The Fed’s dot plot showed 16 officials expect to hike rates this year while two see rates holding steady.
- Goldman Sachs Chief U.S. Economist David Mericle also noted that the median funds rate projection remained quite elevated through 2029, and the median neutral rate dot rose from 3.06% to 3.25%.
- Bond king Jeff Gundlach told CNBC in an interview that he is concerned that the inflation problem in the U.S. may not be “fully respected” and that the Fed should have hiked rates by more in its latest meeting
The Federal Reserve on Wednesday hiked key benchmark interest rates by 25 basis points, the first upward move in three years, to a range of 3.75% to 4.00%, but markets are pricing in another rate hike this year.
For starters, the Fed’s “dot plot,” which maps the forward outlook of policymakers, showed 16 officials expect to hike rates this year while two see rates holding steady. Fed Chair Kevin Warsh refrained from providing his outlook.
Meanwhile, Goldman Sachs believes that the hike could come as soon as the October policy meeting.
Kevin Gordon, Head of Macro Research and Strategy at Schwab Center for Financial Research, noted in a post on X, “The FOMC’s median estimate of the long-run fed funds rate is now at its highest since March 2016.”
Why Goldman Sees Another Quick Rate Hike
Goldman Sachs Chief U.S. Economist David Mericle said in a note after the Fed’s policy decision that the tone of the latest Federal Open Market Committee (FOMC) policy statement and interest rate tightening came in “more hawkish than expected in a few ways,” according to The Fly.
Mericle also noted that with a 16-2 majority projecting another rate hike this year and no dissenting votes against today’s policy move, the FOMC will likely deliver a second 25 bps hike in October, a change from its previous expectation that September would be the only hike.
The economist also noted that median funds rate projection remained quite elevated through 2029, and the median neutral rate dot rose from 3.06% to 3.25%, even as Warsh had said that the hike had “removed a dose of accommodation” three times.
Mericle believes that October is the most likely time for the next move because it is most natural to deliver hikes that the FOMC presented today as supporting “a timelier return” to the 2% target at consecutive meetings. Additional hikes are possible but not the base case, he said.
“The striking feature of the dot plot is the disappearance of the doves,” analysts at Evercore ISI said in a note, as per Reuters. “The old center dovish majority now lines up behind a limited hawkish mid-cycle adjustment — in their eyes at least likely for risk insurance purposes, though Warsh himself did not use the risk insurance language and preferred a more hawkish framing.”
Inflation Concerns Persist
In his speech following the policy announcement, Warsh said that the Fed had concluded that “the plain fact is that inflation is too high and has been for too long.”
Although in August, the U.S. annual core inflation rate eased to 2.4%, down slightly from 2.5% in July, hitting its lowest level since March 2021, inflation levels have remained significantly elevated above the FOMC’s 2% goal. Fed Governor Christopher J. Waller recently noted that it has exceeded that target for five and a half years.
Bond king Jeff Gundlach told CNBC in an interview that he is concerned that the inflation problem in the U.S. may not be “fully respected.” He said that the Fed should have hiked rates by more in its latest meeting – a “stun and done” 50 bps hike – instead of one or two more hikes through a tightening cycle.
What Do Markets Think?
Markets are pricing in at least one more rate hike by the end of 2026. According to data from CME FedWatch tool, the odds for a 25 bps hike in October stand at 52%.
In December, the odds for a 25 bps hike are at 48.9%, while the probability of a 50 bps hike is at 39.5%.
Meanwhile, among ETFs tracking benchmark indexes, the SPDR S&P 500 ETF (SPY) was up 0.56% at the time of writing amid ‘bearish’ sentiment.
The SPDR Dow Jones Industrial Average ETF Trust (DIA) and the Invesco QQQ Trust (QQQ) climbed 0.60% and 0.62%, with both in the ‘extremely bearish’ sentiment territory.
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