Goldman Sachs: US FOMC

The September FOMC minutes revealed broad support for the 25bp rate hike, with officials concerned that inflation remained elevated and had made insufficient progress toward the 2% target. Most participants viewed inflation risks as tilted to the upside, while labour-market risks had become more balanced. Many considered the hike prudent from a risk-management perspective, particularly given the possibility of persistent inflation becoming embedded in expectations. Looking ahead, most participants judged another hike by year-end likely to be appropriate, although they stressed that decisions would remain data-dependent.

Officials highlighted geopolitical developments and surging AI-related investment as ongoing inflation risks, with AI-related demand potentially outpacing supply and keeping goods prices elevated as tariff effects fade. However, medium- and longer-term inflation expectations remained consistent with the Fed’s target, and some recent contributions to core PCE inflation from software and portfolio management fees are expected to diminish following methodological changes.

The staff’s outlook was for inflation to remain somewhat higher than previously projected over 2026—2028 before returning to 2% in 2029, while growth was expected to strengthen and unemployment remain below its longer-run level. Despite higher Treasury yields, many participants judged financial conditions remained supportive of growth, reflecting strong equity markets and narrow corporate credit spreads. The impact of tighter conditions on economic activity is therefore expected to be relatively modest.

Following the latest core PCE data and recent comments from Fed officials, the base case remains for a second rate hike in December, although there is a strong possibility the FOMC ultimately decides that further tightening is unnecessary.