US FOMC monetary policy outlook Report Interpretation

Overview

This FOMC meeting preview sets out Goldman Sachs' view that inflation is likely to return toward target as temporary pressures fade, limiting the case for additional tightening. The firm expects one hike in 2026 and subsequent cuts during 2027.

Core views

Goldman Sachs argues that there is not a strong economic case for additional rate hikes because it attributes the overshoot of the Federal Reserve's 2% inflation target to fading one-time factors. The report also argues that the economy is not overheated, which it identifies as the usual rationale for raising interest rates. The report characterizes recent inflation as somewhat broad-based mainly because tariffs lifted prices across many goods categories. However, it expects tariffs to have little additional impact going forward. It therefore expects the FOMC's communication to frame a hike as an action intended to return inflation to 2%, while avoiding guidance on the future policy path or criteria for further hikes. Goldman Sachs expects the September Summary of Economic Projections to show slightly lower headline and core inflation. It notes uncertainty over how large a downward revision participants may expect from methodological changes. Its forecast table shows 2026 PCE inflation of 3.4% and core PCE inflation of 3.2%, falling to 2.2% for both measures in 2027 and 2.0% thereafter. The table also shows GS forecasts for real GDP growth of 2.0% in 2026, 2.2% in 2027, and 2.3% in 2028, with unemployment at 4.2% through 2029. For the policy-rate outlook, Goldman Sachs expects a 10–8 majority of participants to show one hike in 2026, though it sees risks tilted toward more participants projecting multiple hikes. The firm's own forecast is for one hike followed by cuts in September and December 2027, taking the terminal rate to a slightly higher 3.25%–3.5% range. Its forecast table places the year-end federal funds rate at 3.875% in 2026 and 3.375% in 2027, 2028, and 2029. Goldman Sachs states that its probability-weighted Fed forecast is less hawkish than market pricing.

Analysis framework

Goldman Sachs assesses the inflation drivers, the degree of economic overheating, expected FOMC communication, likely changes in the Summary of Economic Projections, and the distribution of participants' rate projections. It then translates those judgments into a forecast for the federal funds rate path through 2027.

Methodology notes

• Macroeconomics

  Federal Reserve Summary of Economic Projections and policy-rate path analysis

  The report compares Goldman Sachs forecasts with expected participant projections for growth, unemployment, inflation, and the year-end federal funds rate to infer the likely policy path.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Tariff-to-goods-price transmission

  The report attributes broad-based goods-price increases to tariffs, while arguing that their incremental inflation impact should fade.

Key data

• Expected 2026 FOMC rate projections10–8 majority for one hikeGoldman Sachs expects one hike to be the median participant view, with risks toward more multiple-hike projections.
• GS 2026 PCE inflation forecast3.4%Q4/Q4 forecast.
• GS 2026 core PCE inflation forecast3.2%Q4/Q4 forecast.
• GS 2027 PCE and core PCE inflation forecasts2.2% and 2.2%Q4/Q4 forecasts; both measures are forecast at 2.0% thereafter.
• GS year-end federal funds rate forecast3.875% in 2026; 3.375% in 2027–2029The report expects one hike followed by cuts in September and December 2027.
• Terminal rate expectation3.25%–3.5%Slightly higher terminal-rate range expected after the 2027 cuts.

Impact & implications

The report's central implication is that temporary inflation pressures and a non-overheated economy should constrain the need for sustained tightening. Goldman Sachs nevertheless expects a limited near-term hike before policy easing begins in 2027, a path it considers less hawkish than market pricing.

Risks

• The risk to Goldman Sachs' projection is that more FOMC participants could show multiple rate hikes rather than one hike in 2026.
• The scale of any downward inflation-projection revision from methodological changes is uncertain.

What to watch

• The September FOMC statement's explanation for any hike and whether it offers guidance on further tightening.
• Changes in headline and core inflation projections in the Summary of Economic Projections.
• The distribution of participants' projected 2026 policy-rate paths.
• Evidence on whether tariff-driven goods-price effects continue to fade.