Goldman Sachs shifts timeline for next Fed rate increase to December

Goldman Sachs now expects the Federal Reserve's next interest-rate increase to come in December rather than October.

New York Fed President John Williams, who has a permanent vote on the Federal Open Market Committee, said yesterday that one additional rate increase this year could suffice if the economy follows its current trajectory. He found 'no need for urgency' following the September move, adding that it buys the central bank time to examine fresh figures before its next decision.

Williams' forecast features the following projections:

• Growth: GDP expanding 2.25% in the current year, with economic activity strong and possibly accelerating.
• Employment: A 4% jobless rate in 2027.
• Inflation: 3.5% for this year, falling to the central bank's 2% goal by 2028.
• Risks: Higher spending on artificial intelligence might create further price pressures. The central bank must stop supply shocks from embedding persistent inflation.

While Williams left an October move on the table, his statements made waiting more likely. Immediately following his remarks, the probability priced in by markets for a rate increase at the October meeting dropped to 54% from 64%. The two-year Treasury yield simultaneously slipped 2.5 basis points to 4.90%. Those odds have since fallen further to 40%, with the two-year yield now at 4.887%.

Despite being interpreted as leaning dovish, Williams's vision still depends on how the economy behaves. Upcoming figures will dictate not only if another rate rise is necessary but also its timing.

The political calendar also factors in. October's Federal Open Market Committee session is scheduled for late in the month, under a week before the November midterm congressional elections. A rate increase so near Election Day, the author writes, could draw fire from President Trump and fellow Republicans who might see it as an attempt to sway the vote. That does not mean the Fed would hold off on a needed step, but it adds a layer of political sensitivity to the decision.

In the meantime, financial markets are tightening conditions on their own. The 10-year Treasury yield has advanced from approximately 4.61% on August 25 to 5.293%, a jump of roughly 67 basis points. Over a similar span, the two-year yield has moved from 4.26% on August 13 to 4.89%, a 63-basis-point climb.

These elevated rates make borrowing more expensive for companies and consumers, thereby tightening financial conditions. This could provide the Fed with a rationale to skip a move in October while it evaluates new data and the effects of the market-driven tightening already in place.