Goldman Sachs delays expected follow-up hike to December as Fed signals cautious approach
Rising long-term yields provide room to observe; robust consumption and economic resilience remain variables for year-end hike
Expectations are gaining traction that the US Federal Reserve (Fed) will freeze its benchmark interest rate in October and delay any additional rate hikes until late this year. This shift comes as inflation readings came in lower than anticipated, prompting top Fed officials to signal that they are under no pressure to rush their next policy move. The September employment report, slated for release on Friday, is expected to serve as a pivotal data point in determining whether the central bank has the luxury of time.
The shift in market sentiment was triggered by the personal consumption expenditures (PCE) price index for August, released on September 30. The headline PCE price index rose 3.4% from a year earlier, while the core index—excluding food and energy—advanced 3.0%. Historic figures were also revised downward following annual benchmark revisions. The July annual increases were adjusted from 3.7% to 3.4% for the headline index, and from 3.3% to 3.0% for the core index, indicating that inflationary pressures were milder than previously reported.
In response, Goldman Sachs pushed back its forecast for the next potential rate hike from October to December in a report released on September 30. While maintaining its baseline projection for an additional increase, the firm noted a substantial possibility that incoming data could convince the Fed of no further need for tightening. Stephen Brown, senior North America economist at Capital Economics, similarly noted that weaker-than-expected inflation pressures reinforce existing expectations for a pause in October.
Remarks from Fed officials have further fueled speculation that policymakers may opt to assess economic conditions rather than immediately resume rate hikes. Speaking on September 29, New York Fed President John Williams emphasized that following the September rate increase, the central bank has the time to gather additional information and is under no urgency. He also suggested that one more rate increase later this year could be appropriate if the economy evolves as he expects.
Federal Reserve Vice Chair Philip Jefferson echoed a similar sentiment on October 1, stressing that upcoming monetary policy decisions must be guided by incoming economic data and evolving outlooks. Pointing to the recent rise in market yields across various maturities since the September meeting, he explained that the Fed may require more time to deliberate.
The rise in long-term yields can be interpreted as a factor affording the Fed room to pause. Higher long-term yields translate into elevated mortgage rates and increased borrowing costs for corporations. This naturally exerts a cooling effect on the broader economy by dampening household home purchases and corporate investments. If market yields remain elevated, the Fed can assess the lagged impact of these tighter financial conditions before considering consecutive rate hikes.
Nevertheless, expectations for a year-end rate hike persist because inflation remains stubbornly above the Fed’s 2% target, underpinned by resilient consumer spending. Real personal consumption expenditures rose 0.6% month-on-month in August. Even with softer inflation readings, it is premature to conclude that demand in the US economy has cooled significantly.
Sal Guatieri, senior economist at BMO Capital Markets, highlighted this dynamic, noting that while the subdued inflation figures following the PCE release afford the central bank breathing room to skip an October hike, elevated price growth and robust consumer spending still leave the door open for another increase by year-end.
An analysis by Bank of America, cited by MarketWatch on October 1, also drew attention to the economy's robust growth momentum. The firm suggested that upward revisions to growth projections point to improving productivity and a higher "neutral rate"—the theoretical interest rate that neither stimulates nor restricts the economy. If the neutral rate has risen, the past monetary tightening may have been less restrictive than previously assumed. Consequently, Bank of America argued that the Fed needs to re-evaluate whether its monetary policy over the past few years has genuinely operated in restrictive territory.
Attention now shifts squarely to the labor market. The US Bureau of Labor Statistics is scheduled to release the September employment report at 9:30 p.m. Korea time. According to a Dow Jones consensus, economists expect nonfarm payrolls to increase by 84,000, with the unemployment rate ticking up to 4.1%. If realized, job growth would slow from the 162,000 positions added in August.
Should the labor market demonstrate stability while wage pressures continue to moderate, expectations for an October rate pause will likely solidify further. With robust consumer spending supporting growth and inflationary headwinds easing, the Fed would secure ample latitude to forgo rushing additional hikes and closely monitor broader economic developments.
