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Goldman Sachs joined the consensus late Friday, retracting its call for the Fed to stay on hold next week and now expecting a 25 basis point hike at Wednesday's FOMC meeting. The bank cited the risk of a market reaction if the FOMC held while futures priced a nearly 90% probability of a hike. The flip leaves essentially no major Wall Street house expecting the Fed to remain on hold.
Why it matters
Market strategist James Thorne of Wellington-Altus framed the shift as 'the Wall Street wall of mirrors,' arguing the Fed is hiking to validate futures positioning rather than to fight real inflation. Thorne pointed to core CPI at a five-year low of 2.4% and wage growth cooling to 3.1% year-over-year, saying there is no wage-price spiral and no evidence the energy shock is becoming embedded. 'Rate hikes cannot produce oil, expand refining capacity, or repair disrupted supply routes,' he said, warning the move reduces demand, investment, employment, and household purchasing power.
Market impact
KPMG chief economist Diane Swonk pushed back hard on the inflation-is-dead read, noting August core CPI gains were concentrated in services, with super-core services up 0.5% on the month and 3% year-over-year. She estimated the Fed's preferred PCE gauge would print 0.4% headline and 0.3% core in August, putting annualized core PCE at 3.4%, well above the 2% target. Swonk now expects three rate hikes by early 2027 and argued a unanimous FOMC vote would restore the inflation-fighting credibility the bond market is craving. Risk assets now face a tightening cycle priced in by Wall Street positioning rather than the underlying data.
Frequently asked questions
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Why did Goldman Sachs flip its Fed forecast?
Goldman retracted its hold call late Friday after futures priced a roughly 90% probability of a hike. The bank said the FOMC would want to avoid the market reaction that would follow from staying on hold against that pricing.
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Who is James Thorne and what is his argument?
Thorne is chief market strategist at Wellington-Altus. He argues the Fed is hiking to validate Wall Street futures positioning rather than fight real inflation, pointing to core CPI at a five-year low of 2.4% and wage growth cooling to 3.1% YoY.
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What does Diane Swonk say about inflation?
Swonk, chief economist at KPMG, says August core CPI gains were concentrated in services, with super-core services up 0.5% on the month and 3% YoY. She estimates the Fed's preferred core PCE gauge will print 0.3% in August, putting the annualized pace at 3.4%.
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How many rate hikes does Swonk expect now?
Swonk expects three rate hikes by early 2027. She argued a unanimous FOMC vote would restore inflation-fighting credibility that the bond market is craving.
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What is the 'Wall Street wall of mirrors'?
It is Thorne's phrase for a market structure where positioning and futures pricing expectations drive Fed action more than the underlying inflation data. He used it to argue the upcoming hike validates futures market narrative rather than economic reality.
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