A softer-than-expected inflation reading has prompted Goldman Sachs to push back its forecast for the next Federal Reserve interest rate hike, and the bank now says there's a strong chance the central bank is done raising rates altogether.
The shift comes after the personal consumption expenditures (PCE) price index—the Fed's preferred inflation gauge—rose 3.4% year over year in August, coming in below the 3.7% that economists polled by Reuters had expected. That cooler print gave policymakers and Wall Street alike a bit more breathing room.
What Goldman is now saying
Goldman Sachs, one of the largest U.S. investment banks, had previously expected the Fed to deliver another quarter-point rate increase at its October meeting. Now, the bank has moved that call to December, and it's also flagged a “strong chance” that the Fed is finished hiking altogether.
The reasoning is straightforward: if inflation is cooling faster than expected, the Fed has less need to keep tightening monetary policy. A quarter-point hike would bring the federal funds rate to a range of 5.50%–5.75%, a level not seen in over two decades.
Traders have quickly adjusted their own expectations. According to CME Group's FedWatch tool, which tracks market pricing of rate moves, the implied probability of a hike at the October meeting has fallen to about 38%, down sharply from roughly 71% just a week ago. That's a big swing in sentiment, and it reflects a market that is increasingly betting the Fed will hold steady.
Why the PCE report matters
The PCE price index is the Fed's preferred measure of inflation because it captures a broader range of consumer spending than the more widely cited consumer price index (CPI). It also accounts for changes in how people shop—for example, when they switch to cheaper brands or substitute goods. That makes it a more accurate gauge of the actual cost pressures households are facing.
August's reading of 3.4% is still above the Fed's 2% target, but the trend is moving in the right direction. A year ago, inflation was running much hotter, and the Fed has been aggressively raising rates since early 2022 to cool the economy. The latest data suggests those efforts are working, though the Fed has repeatedly stressed that it will be data-dependent and won't hesitate to hike again if inflation proves stubborn.
This isn't just a U.S. story. Central banks around the world are wrestling with the same question of how much more tightening is needed. For instance, the Bank of Japan has recently signaled it may accelerate rate hikes as inflation nears its target, while European economies are dealing with their own inflation pressures. The global backdrop remains one of cautious central banks watching every data point.
What it means for investors
For everyday investors, the key takeaway is that the path of interest rates is the single biggest driver of market sentiment right now. When the Fed hikes, borrowing costs rise for mortgages, car loans, and credit cards, and they also tend to weigh on stock valuations, especially for growth companies that rely on future earnings.
A cooler inflation print and a reduced chance of another hike is generally good news for stocks. Lower rate expectations can lift equity prices, as seen in recent sessions where stocks edged higher on cooler inflation data. It also helps bonds, since yields tend to fall when the market expects fewer hikes.
But investors shouldn't get too comfortable. The Fed has made it clear it will react to incoming data, and a surprise upside in inflation could quickly change the calculus. The odds of a hike in December are still on the table, and the Fed's own projections suggest rates will stay elevated for some time even if the hiking cycle ends.
For those with cash in savings accounts or money market funds, the current environment still offers attractive yields. But if the Fed is truly done, those yields may start to drift lower over time. For borrowers, the message is that rates are likely near their peak, but relief won't come overnight.
What to watch next
The next major data point will be the September jobs report, followed by the next CPI reading. Both will give the Fed—and investors—a clearer picture of whether the economy is cooling enough to keep inflation in check without tipping into recession.
Goldman's revised forecast is just one voice, but it carries weight given the bank's influence. When a major bank shifts its rate call, it often moves market expectations with it. The fact that Goldman is now leaning toward a December hike—or possibly no hike at all—signals that even the most hawkish corners of Wall Street are starting to see the end of the tightening cycle.
For now, the message for investors is to stay diversified and avoid making big bets on the timing of the next move. The Fed's own guidance has been to expect higher-for-longer rates, but the data is increasingly telling a different story. As always, the market will react to each new number, and the next few weeks could bring more volatility.
