Goldman Sachs has delayed its expected timing for the Federal Reserve's second rate hike from October to December, mainly because the latest core PCE inflation came in below expectations and recent remarks by New York Fed President John Williams reduced market expectations for an immediate October increase.

Goldman Sachs also said there is now a significant possibility that the Fed will ultimately conclude that further rate hikes are unnecessary. This means that while the firm still retains a base case for one more hike in December, it has become more cautious about how far this tightening cycle can still go.

Core PCE below expectations weakens urgency for an October hike

U.S. core PCE price index rose 0.25% month over month in August, below market expectations, with a year-over-year increase of 3.01%. Goldman Sachs expects core PCE inflation to rise 3.0% in 2026 on a fourth-quarter-over-fourth-quarter basis, below the FOMC members' median projection of 3.4%.

This means that if the inflation path continues to develop according to Goldman Sachs' current assessment, the price pressures facing the Fed may be weaker than it previously expected, thereby reducing the need for continued rapid rate hikes in the near term. As a result, Goldman Sachs pushed back the timing of the second hike from October to December.

Economic growth is not weak, giving the Fed room to keep observing

However, the latest data also do not show a clear weakening of the U.S. economy. U.S. real GDP growth in the second quarter was revised up by 0.7 percentage points to 2.2% on an annualized quarter-over-quarter basis in the third estimate, mainly due to upward revisions to consumption and investment growth. First-quarter GDP growth was also revised up by 0.4 percentage points to 2.5%.

This shows that the U.S. economy still has some resilience, and consumption and investment have not shown obvious signs of stalling. Therefore, Goldman Sachs' current judgment is not that the economy has weakened enough to force the Fed to stop tightening, but rather that inflation is falling faster than expected, giving policymakers more room to wait and observe.

Upward revision to the savings rate also eases some consumption concerns

The U.S. savings rate for August was significantly revised upward and now stands at 4.1%. A higher savings rate means household balance sheets are in better shape than previously estimated, leaving some buffer for future consumption. However, the U.S. goods trade deficit widened by more than expected in August, creating some drag on third-quarter growth. Goldman Sachs therefore lowered its third-quarter GDP tracking estimate by 0.1 percentage points to 3.3%.

Overall, growth remains relatively strong, but not strong enough to force the Fed to immediately accelerate tightening.

Goldman Sachs begins to question whether further hikes are still necessary

This is also the most important change in the report. Although Goldman Sachs pushed back the timing of the second hike to December, it went further by saying the FOMC may eventually conclude that additional rate hikes are unnecessary. In other words, a December hike remains Goldman Sachs' current base case, but it is no longer a highly certain judgment.

If core inflation continues to cool in the coming months while economic growth remains moderate, the Fed may choose to keep rates unchanged rather than continue raising them. Therefore, the signal conveyed by Goldman Sachs' adjustment this time is not merely "no hike in October, another hike in December," but rather: as inflation data weaken, whether the Fed's current tightening cycle still needs to continue is itself becoming increasingly uncertain.