Goldman Sachs, JPMorgan Reverse Course: Fed Hike Expected This Week

Major Wall Street players Goldman Sachs and JPMorgan have reversed their previous forecasts, now expecting the Federal Reserve to implement a 25 basis point rate hike at its September 15-16 meeting. This shift comes after a week of hotter-than-expected inflation data and rising energy prices, pushing market odds for a hike significantly higher.

Unexpected Inflation Fuels Hawkish Shift

The primary driver behind this sudden change in outlook is August's inflation data, which came in stronger than anticipated. The Consumer Price Index (CPI) rose 0.4% month-over-month, bringing the year-over-year figure to 3.4%. Core CPI, excluding volatile food and energy, also climbed 0.3% for the month, exceeding analyst expectations.

This lack of progress on inflation, coupled with robust producer price readings, has led economists to conclude that the Fed’s preferred inflation gauge, core PCE, likely picked up in August. The Fed has been targeting 2% inflation, and current readings are nearly double that.

Oil Prices and Market Expectations

Adding to the inflationary pressure, crude oil prices have surged above $100 a barrel amid intensified hostilities in the Middle East. This rise in energy costs further fuels concerns that inflation will be difficult to bring down without additional monetary tightening.

Goldman Sachs economists noted that the Federal Open Market Committee (FOMC) would be reluctant to surprise markets. With market odds for a 25 basis point hike jumping from around 70% to nearly 90% following the inflation reports, holding rates steady would now be a significant deviation from market pricing.

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JPMorgan's Extended Hawkish View

JPMorgan has taken an even more hawkish stance, not only forecasting a 25 basis point hike this week but also projecting another 25 basis point increase in December. The bank also raised its estimate for the long-run policy rate to 3.25%.

This indicates a belief that the Fed’s tightening cycle may extend further than previously anticipated, signaling a “tighter for longer” policy path. Such a sustained tightening view could continue to drain liquidity from risk assets into year-end.

Goldman's Nuanced Outlook

Despite the immediate hawkish shift, Goldman Sachs still maintains its outlook for two Fed rate cuts in 2027. However, the timing of these cuts has been pushed back from earlier projections. The bank frames this week’s anticipated hike as more of a response to market dynamics rather than a fundamental signal from the underlying inflation picture.

This suggests that while the Fed may act to align with market expectations now, their longer-term view on inflation and the economy could still lead to easing in the future. Traders should watch for any divergence in Fed commentary from market pricing. Other news indicates that the Fed had kept borrowing costs unchanged all year, following a quarter-point reduction at the end of 2025.

Options market and stocks to watch

This hawkish pivot from major banks could introduce volatility across various sectors. Traders should watch for:

• SPY: Increased rate hike expectations typically weigh on broader market indices. Watch for continued downward pressure or increased put activity.
• QQQ: Tech stocks are often sensitive to higher interest rates, as they impact future earnings valuations. Monitor for potential underperformance.
• USO: With oil prices above $100, energy sector ETFs and related stocks could see continued strength, but also increased volatility if geopolitical tensions escalate.
• GLD: Gold may see mixed signals. While higher rates typically hurt non-yielding assets, increased geopolitical uncertainty and inflation concerns could provide support.
• BAC, WFC: Banks generally benefit from higher interest rates, which can improve net interest margins. Watch for potential upside in the financial sector.

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