Goldman Sachs, JP Morgan expect September Fed hike as inflation lingers

Goldman Sachs and JP Morgan now expect the US Federal Reserve to raise interest rates this week after a string of stronger-than-expected inflation readings challenged hopes that price pressures would continue to ease without additional policy tightening.

The Wall Street banks joined a growing number of forecasters turning more hawkish after data last week showed US consumer and producer prices rose more than expected in August, while oil prices climbed above US$100 a barrel due to renewed hostilities in the Middle East. 

In a note on Friday, Goldman Sachs abandoned its previous call for rates to remain unchanged and now expects a 25-basis-point increase at the US Fed’s Sept 15-16 meeting. JP Morgan, meanwhile, forecasts quarter-point hikes in both September and December.

The latest data have revived concerns that progress toward the Fed’s 2% inflation target could stall after months of moderation.

“We think that the FOMC will be reluctant to surprise,” Goldman Sachs economist David Mericle said.

JP Morgan struck a similarly hawkish tone following the inflation reports.

“The week that saw rising bond yields and energy prices and a firm enough set of inflation readings to make a rate hike at next week’s FOMC meeting more likely than not,” JP Morgan economists led by Michael Feroli said in a note.

The outlook for further Fed tightening will be in focus this week as policymakers conclude their meeting on Wednesday, while investors also watch the Bank of Japan for policy signals.

JP Morgan said the latest inflation data cast doubt on a sustained disinflation trend, leading it to forecast another Fed rate hike this year and raise its estimate of the long-run policy rate to 3.25%.

Markets are pricing in an 87% chance of a quarter-point Fed rate hike this month, up from about 70% before the latest inflation data, with another increase expected in December, according to CME’s FedWatch Tool.

In a separate note on Sunday, Goldman Sachs said it still expects two Fed rate cuts in 2027, though later than previously forecast, as it sees this week’s expected hike as driven more by market pricing than inflation fundamentals.