Goldman Sachs Says Fed May Skip Another Rate Hike; Outlook Clouds BOK Decision

Goldman Sachs Says Odds of an October Hike Are Low

Goldman Sachs has pushed back its forecast for the Federal Reserve’s next rate increase to December from October after U.S. inflation pressures came in weaker than expected. The bank went further, saying there is also a significant chance the current tightening cycle could effectively end without another increase. That shift has made the Bank of Korea’s decision on whether to raise rates again this year more complicated as it weighs the Fed’s next move.

Investing.com reported on October 30 that Goldman Sachs Chief Economist Jan Hatzius revised the firm’s Fed outlook after incorporating the August personal consumption expenditures, or PCE, inflation data and recent comments from New York Fed President John Williams.

The latest inflation data and Williams’s remarks suggest the odds of an October increase are low, Hatzius said, adding that Goldman had pushed back its call for a second rate hike to December. He also said there is a substantial chance the Federal Open Market Committee will ultimately conclude that no further rate increase is needed.

Core PCE inflation rose 0.25% in August from the previous month and 3.01% from a year earlier, both below expectations. Goldman Sachs expects core PCE inflation to rise 3.0% in the fourth quarter, below the Fed’s 3.4% projection.

Williams said on October 29 that another rate increase this year remained possible, but there was no reason to rush. That reinforced the case for a December move rather than one in October. Speaking at an event at the University at Buffalo, he said the economy was broadly in line with his outlook and that it would be appropriate to raise the target range for the federal funds rate once more later this year. The Fed raised its benchmark rate by 0.25 percentage point on September 17, its first increase since 2023.

Williams also said the September increase gave policymakers more time to gather information and removed any need to hurry, effectively ruling out an October move. After his remarks, the implied probability of a rate increase at the October 27-28 meeting fell to around 50% from about 70% in the federal funds futures market. He projected inflation at 3.5% this year and slightly above the Fed’s 2% target next year.

Signs of slowing consumption and employment are also bolstering the case for a pause. The Conference Board said its U.S. consumer confidence index fell to 81.9 in September, on a 1985 base of 100, from 88.6 in August. That was well below the 89.0 estimate compiled by Dow Jones and the lowest reading since April 2014.

That view stands in sharp contrast to a Bank of America analysis published just 10 days earlier that said investors should prepare for the risk of the Fed lifting its benchmark rate above 5%. In a report dated October 19, BofA strategists including Mark Cabana and Meghan Swiber said the Fed could raise rates back to levels seen during the 2022-2023 tightening cycle. The upper end of the policy rate then reached 5.5%.

Earlier, the Fed raised the benchmark rate by 0.25 percentage point to 3.75%-4.00% at its FOMC meeting on October 16. It was the first monetary tightening move in three years and two months since July 2023.

Attention is now turning to whether the Bank of Korea will raise rates again this year. The gap between the upper end of U.S. rates and South Korea’s benchmark rate of 3.00% has widened again to 1 percentage point, while higher oil prices are adding to concerns over won weakness and inflation pressure.

For the BOK, which had been leaning toward a pause in October to assess the impact of back-to-back increases in July and August, the policy calculus has become more complicated. Exchange-rate and inflation conditions argue for another increase. But already elevated market rates and heavier interest burdens on households and companies call for a more measured approach. The key question is whether the path of holding in October and raising again in November will remain intact, or whether the timing of the next move will be brought forward.

Kang Kyung-ju, Hankyung.com reporter memory@hankyung.com