Americans squeezed by unnervingly high borrowing costs might be closer to the end of the Federal Reserve’s latest tightening push, but that doesn’t necessarily mean mortgage or other long-term rates will quickly fall. 

Goldman Sachs chief economist Jan Hatzius now expects just one more quarter-point Fed hike, in December, and says even that move could disappear if inflation keeps cooling. 

The shift comes barely two weeks after the Federal Reserve raised its benchmark range to 3.75%-4.00%, its latest attempt to bring inflation back toward 2%. 

Since then, the case for aggressive tightening has weakened.

Employers added only 29,000 jobs in September, while unemployment edged up to 4.2%, and underlying monthly inflation has shown softer readings according to the Bureau of Labor Statistics.

Hatzius argues markets are pricing in too much additional tightening. Nevertheless, it raises the question of whether December will bring one final increase, or whether September’s hike will ultimately prove to be a rare “one-and-done.”

Why Goldman thinks the Fed can stop sooner than markets expect

The case for a longer rate-hike cycle has weakened swiftly as the economy is now sending the Fed a very different mix of signals. 

For borrowers, businesses and investors, that matters because additional hikes would add pressure to an economy already dealing with expensive credit and a visibly softer labor market.

The clearest change is hiring.

Employers added just 29,000 jobs in September, far below the roughly 90,000 expected, while July and August payrolls were revised down by a combined 60,000, as reported by Financial Times. Unemployment also rose to 4.2%, and average hourly earnings increased only 0.1% for the month, as reported by NBC News, suggesting wage pressure is no longer building at the pace policymakers feared.

Inflation is still above target, but the monthly trend has become less threatening. 

Reuters reports that August core personal consumption expenditures (PCE) rose 0.2% from the prior month, even as headline PCE remained 3.4% higher than a year earlier.

Hatzius argues that if that monthly pace continues, that could remove the need for further tightening altogether.

In the CNBC interview he was unusually direct in saying “I think markets are discounting still three hikes, and I would say that’s not necessary.” 

Financial conditions are also doing part of the Fed’s work. 

The 10-year Treasury yield recently reached about 5.34%, a 24-year high, while mortgage rates have climbed above 7%, as reported by NBC News. That means households and companies are already facing tighter financing even without another Fed move.

Together, those signals explain why Goldman sees diminishing returns from more hikes. The next question is whether other major banks, and the Fed itself, are prepared to reach the same conclusion.

Goldman Sachs now expects one final Fed rate hike in December

Andrew Harnik / Getty Images

Wall Street is moving closer to Goldman’s rate path

Goldman’s forecast is best described as a bet that the current tightening cycle will prove much shorter than the more hawkish scenarios still on the table. 

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JPMorgan is already close to Hatzius, expecting one more December hike before the Fed stops, while the Fed’s own September median also pointed to roughly one additional quarter-point increase this year.

The sharper divide is with firms still expecting more tightening. 

Morgan Stanley sees hikes in December 2026 and March 2027, taking the target range to 4.25%-4.50%. Bank of America had been even more aggressive before the latest jobs report, forecasting hikes in both October and December.

Earlier in the week, the implied probability of an October hike had risen above 70%, as reported by Tradingpedia. After weaker data and more cautious Fed commentary, that probability dropped to about 13.8% following Friday’s jobs report as reported by Invezz.

That leaves the market increasingly centered on an October pause followed by one December move.

The bigger unresolved question is whether another soft inflation reading pushes expectations one step further, toward no additional hike at all.

The Fed may be near the end, but relief could take longer

The next test comes quickly. 

The October 14 CPI report could determine whether September’s rate increase becomes the start of a new tightening cycle or something much closer to a one-off move.

Hatzius said another soft inflation reading would be consistent with the Fed skipping a rate hike in October, while continued monthly inflation readings around 0.2% could also lead policymakers to forgo a December hike.

That would leave Goldman’s forecast even more dovish than its current one-hike base case.

But for households, the end of Fed tightening would not automatically translate into cheaper borrowing. Hatzius is more confident that markets are overpricing short-term rate increases than he is that long-term yields will fall quickly. 

Treasury supply and other forces could keep those yields elevated even if the Fed stops its rate hikes. Moreover, mortgage rates are tied far more closely to longer-term bond yields than to the Fed-funds rate itself.

So the next phase of the story is not simply whether the Fed hikes rates again. It is whether inflation cools enough to end tightening and whether financial markets finally deliver the rate relief consumers have been waiting for.

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