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Markets that had expected the Federal Reserve to cut rates this year now appear to be pricing in the opposite: a chance of higher interest rates in 2026. Goldman Sachs pushes back, arguing recent moves in market pricing overstate the likelihood of a Fed rate rise and that the path for policy is still tilted toward easing next year.
That debate matters because even shifting odds of a rate hike change borrowing costs, stock valuations and how savers and borrowers plan for the months ahead. Here’s why Goldman believes investors’ newfound hawkishness may be misplaced.
Trading desks and derivatives markets have lifted the implied probability of a Fed increase to roughly 45% for 2026 — a big jump from about 12% before the Middle East conflict intensified. Goldman Sachs, however, still models two rate cuts in 2026 as its baseline and lays out reasons why the Fed is unlikely to move higher.
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- Smaller supply shock: Goldman notes the current rise in oil prices and related supply disruptions are narrower than the major shocks that historically sparked persistent inflation, such as the 1970s oil embargo or the global supply interruptions during the COVID-19 era.
- Weaker wage pressure: A cooling labor market and modest wage growth make it harder for energy-led price jumps to feed into broad-based inflation; when wages aren’t accelerating, inflation gains from higher commodity costs tend to fade.
- Policy already near neutral: The firm finds that current policy rates sit close to levels implied by standard monetary policy rules, reducing the case for further tightening unless inflation surprises to the upside.
- Fed reaction function: Historically, the Fed has rarely tightened policy solely because of oil-price spikes; Goldman’s review of Fed communications and projections suggests higher oil forecasts have not automatically translated into higher policy rates.
How this changes the outlook for markets and consumers
If Goldman’s view holds, investors could be overpaying for protection against rate increases — which would alter positioning across bonds, equities and rate-sensitive sectors. For borrowers, a durable expectation of cuts next year would ease refinancing concerns, whereas a real shift toward hikes would raise borrowing costs.
The bank’s argument rests on a mix of structural and cyclical conditions: energy-driven inflation that is limited in scope, a less heated labor market than in past inflationary episodes, and monetary policy that is not deeply accommodative today. Taken together, those elements make a sustained surge in core inflation less likely without a simultaneous rebound in wage growth.
Where the risks still lie
Goldman’s assessment is not a guarantee. A few developments could flip the script: a sharper, more persistent climb in oil prices; an unexpected re-tightening of labor markets; or broadening supply disruptions that push firms to raise prices across categories. Financial conditions tightening further, or a surprising CPI acceleration, would also force the Fed to reassess.
For now, the Fed’s path looks conditional. Policymakers will focus on incoming inflation data, labor-market signals and measures of inflation expectations before altering their stance.
Quick takeaways
- Market odds of a 2026 hike have jumped, but Goldman sees those odds as overstated.
- Baseline forecast: Goldman still expects two rate cuts in 2026.
- Key indicators to watch: oil prices, wage growth, core inflation and financial conditions.
In the coming weeks, investors will be watching energy markets and labor reports closely. If wage growth remains subdued and inflation expectations stay anchored, Goldman’s contention — that the Fed is more likely to ease than to tighten — will remain credible. Conversely, any signs of broadening price pressures would quickly force a reassessment of that view.
