What to Know

  • Goldman Sachs late Friday rescinded its forecast that the Federal Reserve would keep rates on hold next week.
  • The bank now expects the Fed to raise rates by 25 basis points on Wednesday.
  • Markets are pricing a nearly 90% chance of a rate hike, a key factor cited in Goldman Sachs shifting its call.
  • Goldman Sachs said the CPI report only lifted its August core PCE forecast slightly to 0.26% and did not change its fundamental inflation view.
  • Market strategist James Thorne argued that any tightening would be aimed at calming Wall Street rather than materially reducing inflation.
  • Diane Swonk of KPMG disagreed, pointing to firmer services inflation and estimating August PCE at 0.4%, with core PCE up 0.3%.
  • Core CPI has fallen to a five-year low of 2.4%, while wage growth has slowed to 3.1% year-over-year.
  • Swonk said the annualized pace of core PCE could reach 3.4%, still well above the Fed’s 2% target.
  • Swonk now expects three rate hikes by early 2027 and said the odds of a unanimous Fed vote have risen.

Goldman Sachs Joins the Rate-Hike Consensus

Goldman Sachs has moved into line with the broader Wall Street consensus by withdrawing its forecast that the Federal Reserve would leave interest rates unchanged next week. The decision, made late Friday, leaves the prospect of a 25 basis-point rate increase on Wednesday looking close to universally expected among major market participants.

The significance of the Goldman Sachs shift is not simply that another bank changed its forecast. It is that the move came despite the bank saying its underlying inflation view had not materially changed. Goldman Sachs noted that the latest CPI report only raised its August core PCE forecast slightly to 0.26%, yet the firm concluded that the Federal Open Market Committee would likely want to avoid the market reaction that could follow if policymakers stayed on hold while traders were pricing a nearly 90% chance of a hike.

That framing has made the coming Fed decision more than a routine policy call. It has turned the expected hike into a test of whether the central bank is primarily reacting to incoming inflation data or to the expectations embedded in financial markets. For investors, the distinction matters because it shapes assumptions about how the Fed will behave if market pricing and economic fundamentals diverge again.

A Debate Over Inflation Versus Market Expectations

The core of the debate is whether the Fed has enough inflation evidence to justify tightening, or whether policymakers are being cornered by market pricing. A Federal Reserve rate hike is normally understood as a tool to cool demand, slow credit creation, and reduce inflationary pressure over time. But if inflation pressures are being driven by energy supply, refining constraints, or disrupted supply routes, higher interest rates may have only an indirect and potentially costly effect.

James Thorne, chief market strategist at Wellington-Altus, has framed the potential hike as an example of what he called a Wall Street wall of mirrors. In his view, the Goldman Sachs adjustment reveals the tension clearly: there was no material change in the inflation outlook, but the policy expectation shifted because markets had already priced in a move. That would make the hike less about Main Street inflation conditions and more about avoiding turbulence in financial markets.

Thorne argued that rate hikes cannot produce oil, expand refining capacity, or repair disrupted supply routes. They can, however, reduce demand, investment, employment, and household purchasing power. His argument is that if the inflation problem is not becoming embedded in wages or broader prices, then tightening policy risks creating economic damage without solving the source of the pressure.

Wages and Core CPI Complicate the Hawkish Case

Several figures cited by market participants help explain the skepticism around another hike. Core CPI has dropped to a five-year low of 2.4%, suggesting that some underlying inflation measures have cooled meaningfully. Wage growth has slowed to 3.1% year-over-year, a level that Thorne says does not demonstrate a wage-price spiral.

That point is central to the argument against tightening. A wage-price spiral occurs when rising wages feed higher prices, which then lead workers to demand still higher wages. If that cycle is absent, some economists and strategists see less reason for the Fed to lean aggressively against the economy. Thorne has also argued there is no verified second-round inflation and no evidence that the energy shock is becoming embedded.

Still, inflation data can send mixed signals. Core CPI is only one measure, and the Fed’s preferred inflation gauge is the PCE Index rather than CPI. That distinction has become crucial in the latest debate because some analysts believe the CPI details point to a firmer PCE reading than the headline interpretation might suggest.

Swonk Sees a Stronger Inflation Warning

Diane Swonk, chief economist at KPMG, takes a different view. She has highlighted that the core CPI gains were heavily concentrated in services. More specifically, she pointed to super core services, which she said rose 0.5% and were up 3% year-over-year. Services inflation is closely watched because it can be more persistent than goods inflation and may respond more slowly to improving supply conditions.

Based on the CPI data, Swonk said the PCE Index is likely to be higher by 0.4% in August, with core PCE up 0.3%. She added that this would put the annualized pace of core PCE at 3.4%, much further above the Fed’s 2% target than core CPI alone might imply. That assessment supports the case that inflation risks remain more active than the five-year low in core CPI suggests.

Swonk now expects three rate hikes by early 2027. She also said the probability of a unanimous vote has risen, arguing that such a result would provide a needed boost to the Fed’s inflation-fighting credibility. In her view, the bond market is looking for evidence that policymakers remain committed to restraining inflation rather than allowing price pressures to drift above target.

The Shadow of an Earlier Fed Pivot

The current moment also stands in contrast to the Fed’s earlier policy turn. In September 2024, the central bank began a rate-cutting cycle while annual core CPI was running well above 3%. At that time, the Fed cut its benchmark fed funds rate by 50 basis points rather than the assumed 25 basis points. That decision remains an important reference point for traders trying to understand the Fed’s tolerance for inflation and its sensitivity to economic risk.

Fast-forward two years, and market assumptions have shifted sharply. Traders now broadly expect the Fed to begin a rate-hike cycle even though core CPI has eased to 2.4%. The contrast raises a central question for monetary policy: is the Fed reacting to the current data, to its preferred inflation gauge, to its credibility problem, or to the financial-market consequences of surprising investors?

That question is especially sensitive because the Fed has sought at various times to reduce dependence on forward guidance. If policymakers hike primarily because markets priced one in, critics may argue that financial futures have become a form of informal guidance in reverse. Rather than the Fed guiding markets, markets could be seen as guiding the Fed.

Why the Wednesday Decision Matters

For Wall Street, the expected Wednesday decision is about more than the size of the move. A 25 basis-point increase would confirm market expectations and likely reinforce the idea that policymakers remain focused on inflation credibility. A decision to hold would challenge the nearly 90% market pricing cited by Goldman Sachs and could trigger a repricing across bonds, equities, and rate-sensitive sectors.

The Fed must also manage communication. If it raises rates while acknowledging that its fundamental inflation view has not changed significantly, investors may focus on whether the move is defensive. If it emphasizes services inflation and core PCE risks, the hike may be interpreted as a more traditional inflation-fighting step. The tone of the statement, the vote split, and any guidance about future moves will likely matter as much as the rate decision itself.

For households and businesses, tighter policy can affect borrowing costs, investment decisions, employment plans, and spending behavior. That is why the debate between Thorne and Swonk is important beyond trading desks. One side sees a risk that the Fed validates Wall Street pricing at the expense of the real economy. The other sees a risk that the Fed underestimates persistent inflation and loses credibility with the bond market.

Market Implications Into the Fed Meeting

Heading into Wednesday, the market narrative has narrowed around a 25 basis-point hike. Goldman Sachs shifting away from its no-hike view reinforces the sense that the Fed has limited room to surprise without producing a significant market reaction. Still, the reasons behind the hike remain contested, and that debate may shape the market response after the decision.

If investors conclude the Fed is hiking because inflation in services and core PCE is still too firm, yields may remain supported and expectations for additional tightening could strengthen. If investors conclude the move is mainly about validating market pricing, the reaction could be more complex, with traders questioning the durability of any future guidance. Swonk’s expectation of three rate hikes by early 2027 gives markets a concrete hawkish path to consider, while Thorne’s critique warns that the economic cost of tightening could outweigh the inflation benefit.

The result is a Fed meeting loaded with signaling risk. A hike may be widely expected, but the justification will determine how markets interpret what comes next. FXCOINZ will be watching whether policymakers emphasize credibility, services inflation, market stability, or a mix of all three as the Fed prepares to deliver one of its most scrutinized decisions of the year.

Frequently Asked Questions (FAQs)

What is the Federal Reserve expected to do on Wednesday?

The Federal Reserve is widely expected to raise rates by 25 basis points on Wednesday, with market pricing showing a nearly 90% chance of a hike.

Why did Goldman Sachs change its forecast?

Goldman Sachs withdrew its forecast for no rate hike because it expects the Fed to avoid the market reaction that could follow from holding rates steady while traders are already pricing a hike.

Did Goldman Sachs say its inflation view changed?

No. Goldman Sachs said the CPI report only raised its August core PCE forecast slightly to 0.26% and did not change its fundamental inflation view.

Why does James Thorne oppose the logic of a hike?

James Thorne argues that a hike would be aimed at calming Wall Street rather than solving inflation pressures, especially if those pressures are linked to energy supply, refining capacity, or disrupted routes.

What inflation evidence supports a more hawkish Fed stance?

Diane Swonk points to strong services inflation, including super core services rising 0.5% and 3% year-over-year, as evidence that inflation may be firmer than core CPI suggests.

What is the Fed’s preferred inflation measure?

The Fed’s preferred inflation gauge is the PCE Index, not CPI. Swonk estimates August PCE at 0.4% and core PCE at 0.3%.

How does core CPI compare with the Fed’s target?

Core CPI has fallen to a five-year low of 2.4%, but Swonk says the annualized pace of core PCE could be 3.4%, which remains above the Fed’s 2% target.

What does Swonk expect after this meeting?

Swonk expects three rate hikes by early 2027 and believes the probability of a unanimous Fed vote has increased.

Why does the rate decision matter for markets?

The decision matters because a hike would validate current market pricing, while a hold could challenge expectations and potentially trigger a broad repricing across rate-sensitive assets.