U.S. inflation remains “persistently high”! Goldman Sachs changes its stance: The Federal Reserve’s rate hike cycle is not over yet, another 25 basis points increase possible in March next year

According to Zhitong Finance APP, the higher-than-expected US October CPI data released on Tuesday prompted Goldman Sachs to adjust its previous prediction that the current Fed rate hike cycle would end in December. This Wall Street financial giant now expects the Fed to raise rates by another 25 basis points in March next year.

Both the overall and core US October CPI monthly rates came in above market expectations, indicating that price pressures remain high and reinforcing the rationale for the Fed to continue raising rates. Data released by the US Department of Labor (BLS) on Tuesday showed that the US October CPI rose 0.4% month-on-month, higher than the market expectation of 0.3% and the previous value of 0.6%. The month-on-month increase in core CPI, which excludes energy and food and other volatile items, was 0.3%, above the market expectation of 0.2% and matching the previous value of 0.3%. (There is no year-on-year data for October CPI and core CPI, as last October's US government shutdown resulted in missing CPI figures.)

This CPI release is the last before the Fed’s December 8-9 FOMC meeting (the November CPI is scheduled for December 10, the day after the decision, at which point year-on-year data will resume). Last week’s report showed 165,000 new non-farm jobs added in October, far exceeding expectations, and the unemployment rate fell to 4.1%. Combined with the lack of cooling in core inflation this month, the market’s focus has shifted to whether the December rate hike will be 25 or 50 basis points.

After the release of the US October CPI data, the market increased its bets on Fed rate hikes. In addition to fully pricing in a December rate hike, the market also raised its bets on the Fed raising by 50 basis points next month, and further increased bets that the Fed will hike at least twice before mid-2027.

Goldman Sachs is the first institution among its peers to adjust its forecasts. Goldman believes that compared to January next year, the Fed is more likely to raise rates again in March. The bank expects inflation to ease somewhat by the end of this year, but warns that as seasonal price pressures reappear at the start of next year and costs remain high, inflation may rise again.

David Mericle, Chief US Economist at Goldman Sachs, stated: “By the March meeting next year, or possibly even by the January meeting, the energy shock will likely have largely passed. But we suspect recent inflation data will prompt most FOMC members to signal—in the December dot plot—a third rate hike.”

In addition, Goldman Sachs now expects the Fed to start cutting rates in December 2027, three months later than previously forecast. Goldman also expects further rate cuts by the Fed in March, June, and September 2028.

It is worth noting that the latest October CPI data coincided with the high threshold for major rate hikes mentioned by Fed Governor Waller on Tuesday. Waller said on Tuesday that he supports a rate hike in December, warning that if inflation continues to accelerate, he would support a 50 basis point hike to maintain the Fed’s credibility.

Waller noted that despite strong economic performance and a stable labor market, inflation remains too high. Waller said: “If, as I expect, inflation improved month-on-month in October, I would be inclined to support raising the policy rate by 25 basis points. But if the October CPI data released later today is similar to the last two months—core CPI inflation around or above 0.3%—stronger policy action may be needed. In that case, I believe a 50 basis point hike should be considered at the December meeting.” Waller’s candid remarks represent the strongest signal yet from a Fed official—the decision-makers not only need to hike rates in December, but the hike could exceed the 25 basis points expected by the market.

2027 FOMC voting member and Chicago Fed President Austan Goolsbee, in an interview on Tuesday, described the latest inflation report as “alarming, almost overheated and very troubling.” His main concern is that tariffs and energy shocks have not faded sufficiently, and services inflation continues to run high. However, he did not explicitly support a 50 basis point hike in December, emphasizing instead that no policy options should be ruled out in advance.

Philadelphia Fed President Anna Paulson, by contrast, was more cautious. She supports raising rates at a gradual pace, saying: “For now, it remains appropriate to continue tightening policy gradually.” She also noted that wage pressures remain limited and inflation expectations are still aligned with the central bank's 2% target.

Paulson stated: “Skipping a rate hike is just adjusting the pace, not a policy shift. There is likely still room for tightening going forward. However, when conditions permit, I prefer a gradual tightening,” she further explained that slowing the pace of hikes allows households, businesses, and the financial sector time to adjust, and also enables policymakers to continually assess economic data. She said: “When policy direction is well understood by the market, a gradual path works best. If the market already expects more tightening, gradual hikes will not cause us to lag the policy target.”