Financial markets adjusted expectations sharply after August’s inflation data increased bets on a Federal Reserve rate increase at the upcoming FOMC meeting. Goldman Sachs now anticipates a 25 basis point hike, marking a change from its earlier projection of a hold.
The Consumer Price Index for August showed a 0.4% rise from the previous month, leaving the annual rate at 3.4%, consistent with market consensus. Core inflation, which excludes food and energy, advanced by 0.3% month-over-month, slightly surpassing forecasts, with an annual core rate of 2.4%.
According to Goldman Sachs, this inflation data led the firm to change its outlook on this week’s FOMC decision. Meanwhile, despite the stronger likelihood of a rate hike, the analyst does not believe current economic conditions strongly support an increase.
Goldman maintains its view that recent inflation above the 2% target largely reflects short-lived factors that should ease over time. The firm’s forecast for core PCE inflation was only modestly revised upward following the data release.
Market participants are now overwhelmingly pricing in a 25 basis point rate increase, with probabilities nearing 90%, as per CME Group’s FedWatch tool.
Historical analysis from Carson Investment Research notes that during the last five Fed tightening cycles, the S&P 500 typically declined in the month following an initial 0.25% hike but managed double-digit gains over the following year.
