Goldman Sachs Expects Fed Chair Kevin Warsh to Raise Rates This Week — But Not Because of Oil Prices.

Goldman Sachs (GS) has executed a dramatic reversal of its Federal Reserve forecast, abandoning its prior expectation that rates would remain unchanged at this week’s September 15-16 FOMC meeting and now projecting a 25-basis-point hike that would lift the federal funds rate to a target range of 3.75% to 4.00%.

As recently as last month, the bank's chief economist Jan Hatzius had characterized a September rate increase as "very unlikely," arguing that softer jobs and inflation data made it difficult to justify any shift toward tightening. 

Now, though, the CME FedWatch Tool shows expectations have soared to 94.5% for a 25 basis point rate hike, which shows that fed funds futures traders are pricing in an all-but-guaranteed increase when monetary policymakers meet this week.

In light of the overwhelming popular consensus, "We think that the FOMC will be reluctant to surprise," wrote Goldman’s David Mericle in explaining the pivot. 

Wall Street Analysts Reassess September Rate Hike Odds

Along with Goldman, JPMorgan, HSBC, and Deutsche Bank have all aligned on forecasting a quarter-point increase, and a Reuters poll found that 85% of economists now expect a hike – a stunning reversal from just one week earlier, when more than two-thirds expected the Fed to hold. 

Goldman's framing of the anticipated move is relatively nuanced: the bank characterized it as a response to market dynamics and credibility concerns rather than a signal that underlying inflation has fundamentally deteriorated. The bank continues to project two rate cuts in 2027, albeit on a delayed timeline, suggesting it views this as a limited tightening episode rather than the opening of an aggressive hiking cycle.

The investment bank’s economists acknowledged that while they do not see a strong economic case for raising the funds rate – attributing most of the inflation overshoot to one-time factors from tariffs and energy supply disruptions – the risk of not hiking when markets overwhelmingly expect it could trigger a disorderly selloff in long-dated Treasuries. 

More Factors Forcing the Fed’s Hand

With the 10-year Treasury yield ($TNX) already touching 5% for the first time since 2023, the bond market is effectively forcing the Fed's hand along with the Wall Street consensus.

August's Consumer Price Index (CPI) rose 0.4% monthly with headline inflation holding at 3.4% annually, while producer price data came in hotter than expected, leading analysts to conclude that core PCE inflation — the Fed's preferred gauge — likely accelerated in August.

Simultaneously, crude oil (CLV26) surged past $100 per barrel as the Middle East conflict intensified, with Brent (CBX26) reaching $107 and U.S. diesel prices hitting an unprecedented $6 per gallon, embedding inflationary pressure deep into the transportation, agricultural, and manufacturing supply chains.

At the same time, Fed Chair Kevin Warsh's credibility is squarely on the line after his hawkish Jackson Hole speech in late August, where he warned the Fed would have "work to do" if policymakers lacked confidence that inflation was declining toward the 2% target. 

Expect Another “Good Family Fight”

Despite the hawkish consensus, meaningful dissent persists both within the Fed and among outside economists. Critics warn that a rate hike could prove to be a policy mistake, noting that the economy may be more vulnerable than commonly believed; that higher borrowing costs cannot fix oil supply disruptions; and that the Fed could be forced into an embarrassing reversal if it hikes now and must cut within months. 

Goldman's own strategists have tried to reassure equity investors, with team members arguing that corporate earnings rather than interest rates remain the primary driver of stock performance, and that the S&P 500's forward price-to-earnings multiple has already compressed from 22 to 19 this year – suggesting much of the adjustment is behind the market. 

The bank's year-end S&P 500 Index ($SPX) target of 8,000 implies continued confidence in equities even in a modestly tighter monetary environment, though history shows the index typically drops approximately 2% in the quarter following an initial rate hike before recovering 9% over the following 12 months.

To see how investors can brace for a volatility surge this September, check out this clip from our official Barchart YouTube.

This article was created with the support of automated content tools from our partners at Sigma.AI. Together, our financial data and AI solutions help us to deliver more informed market headline analysis to readers faster than ever.  

On the date of publication, Sarah Holzmann did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.