Hotter-than-expected US inflation and a surge in oil prices have revived concerns over sticky price pressures, prompting major Wall Street banks to raise their forecasts for a September Fed hike
Goldman Sachs and J.P. Morgan have turned more hawkish on US monetary policy, with both major Wall Street banks now expecting the Federal Reserve to raise interest rates at its meeting this week as persistent inflation pressures challenge expectations of further disinflation.
The shift in forecasts comes after a series of stronger-than-expected inflation readings showed that price pressures in the US economy remain elevated. Consumer and producer prices both increased more than economists had anticipated in August, raising concerns that progress toward the Federal Reserve’s 2 per cent inflation target could stall.
The inflation concerns have been compounded by a sharp increase in energy prices. Oil prices have moved above $100 a barrel amid renewed hostilities in the Middle East, raising the risk that higher fuel and transportation costs could feed into broader consumer prices.
Goldman Sachs changes September call
Goldman Sachs on Friday reversed its previous expectation that the Federal Reserve would leave interest rates unchanged at its September 15-16 meeting.
The bank now expects the Fed to deliver a 25-basis-point rate increase this week, reflecting the latest inflation data and the growing probability of a hike being priced into financial markets.
“We think that the FOMC will be reluctant to surprise,” Goldman Sachs economist David Mericle said in a note, pointing to the growing market expectation of a September move.
More from BusinessThe bank’s latest assessment suggests policymakers could find it difficult to hold rates steady without sending a potentially confusing signal to markets, particularly after investors have significantly increased their expectations for a hike.
Goldman Sachs nevertheless expects the Fed to resume easing monetary policy in the longer term. In a separate note on Sunday, the bank said it still expects two interest-rate cuts in 2027, although it now expects those reductions to come later than previously forecast.
Goldman said the expected September increase appears to be driven more by market pricing than by a fundamental deterioration in the underlying inflation outlook.
J.P. Morgan sees two hikes
J.P. Morgan has adopted an even more hawkish outlook, forecasting a quarter-point rate increase in both September and December.
“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,” J.P. Morgan economists led by Michael Feroli said in a note.
The bank said the latest inflation data had cast doubt on the sustainability of the disinflation trend that had been evident over the past several months.
J.P. Morgan has also raised its estimate for the long-run US policy rate to **3.25%**, signalling that it expects borrowing costs to remain higher over the longer term than previously anticipated.
Markets sharply raise rate-hike bets
Financial markets have responded strongly to the latest inflation figures.
Markets are now pricing in an 87 per cent probability of a quarter-point Fed rate hike in September, up from roughly 70 per cent before the latest inflation data, according to CME’s FedWatch Tool.
The shift illustrates how quickly expectations can change when inflation data challenge assumptions about the direction of monetary policy.
The Fed’s decision on Wednesday will therefore be closely watched, not only for the size of any rate move but also for policymakers’ guidance on the path of interest rates over the remainder of the year.
Investors will pay particular attention to the central bank’s policy statement and projections for clues about whether the September increase would represent a one-off move or the beginning of a renewed tightening cycle.
Complicated Fed outlook
The latest developments leave the Federal Reserve facing a complicated policy environment. While inflation remains above its 2 per cent target, policymakers must also weigh the potential economic costs of keeping interest rates too high for too long.
Higher oil prices could further complicate the inflation outlook if elevated energy costs persist. At the same time, stronger-than-expected price data could make it harder for the Fed to justify an extended period of monetary easing.
The central bank’s challenge is particularly significant because inflation had appeared to be moderating for much of the year. The latest readings have raised the possibility that the final stage of bringing inflation back to the 2% target could prove more difficult than expected.
The Fed’s September meeting comes as investors also monitor monetary policy developments elsewhere, including signals from the Bank of Japan.
For now, the growing consensus among major Wall Street banks points toward a quarter-point US rate increase this week, followed by another possible hike in December.
The key question for markets will be whether the Fed views the latest inflation uptick as a temporary setback or evidence that price pressures are proving more persistent — a distinction that could determine the trajectory of US interest rates well into 2027.
