Goldman Sachs Analysis: Interest Rate Cuts Expected in Second Half of 2027, How Long Will High Rates Last?

Summary: Goldman Sachs expects another rate hike in December, but the duration of high rates will determine the economic cost.

Editor’s Note: U.S. inflation has risen again, making the Federal Reserve's interest rate hike issue a market focus once more. Data released on October 14 showed that the U.S. CPI rose by 0.6% month-on-month and 3.7% year-on-year in September. Gasoline prices contributed to more than half of the monthly increase, but excluding food and energy, the core CPI still rose by 0.3% month-on-month, unchanged from August, indicating that underlying price pressures have not further eased.

The stickiness of inflation provides a reason for continued tightening, but high financing costs are also accumulating growth pressures. For the market, whether the next rate hike occurs is just a short-term question: the longer-term variable is how long rates will remain high and how long businesses and households will have to endure high financing costs.

Goldman Sachs' baseline in its macro research briefing suggests that the Federal Reserve will raise rates once more in December, followed by three rate cuts starting in September 2027, with long-term rates expected to decline in the coming months. Under this scenario, Goldman Sachs estimates that higher rates will drag U.S. GDP growth down by about 0.2 percentage points by 2027; if rates remain at current levels, the drag will exceed twice this figure.

This implies that Goldman Sachs' judgment of relatively limited growth costs relies on subsequent rate declines. If inflation does not recede and long-term financing costs remain high, the market will need to reassess not only how much more the Federal Reserve will raise rates but also how long the U.S. economy can withstand these conditions.

The following is a translation of the original text:

After inflation exceeded expectations, the market reassessed the Federal Reserve's rate hike path. However, the scenario analysis provided by Goldman Sachs pushes the issue further towards growth: rates have already risen to high levels, and how long they are maintained next could significantly alter the economic costs of tightening.

According to the report, Goldman Sachs still expects the Federal Reserve to raise rates once more in December, followed by three rate cuts starting in September 2027. Meanwhile, its baseline assumption is that long-term rates will decline from current levels in the coming months.

Under this path, Goldman Sachs estimates that higher rates will drag U.S. GDP growth down by about 0.2 percentage points by 2027. If rates remain at current levels, the drag will expand to more than twice the baseline estimate.

The gap between the two scenarios reveals the most important judgment of this report: future growth pressures depend not only on the Federal Reserve's next actions but also on whether market financing costs can decline accordingly.

Core Inflation Not Cooling, Fed Still Struggling to Relax

U.S. inflation rose in September, with energy being the main driver. Gasoline prices rose by 9.1% month-on-month, pushing the overall CPI monthly increase from 0.4% in August to 0.6%.

However, price pressures are not solely concentrated in energy. The core CPI has risen by 0.3% month-on-month for two consecutive months, while housing price increases rose from 0.3% in August to 0.4%. This makes it difficult for the market to explain this inflation performance solely through fluctuations in gasoline prices.

For the Federal Reserve, the key is whether price increases can be sustained. Energy prices can quickly push overall inflation higher, and their subsequent impact depends on price trends and cost transmission; whether core inflation can stabilize and slow down relates to policymakers' judgments on underlying price pressures.

This data is still insufficient to determine the subsequent policy path, but the lack of further cooling in core inflation means that more evidence is needed to judge whether inflation will continue to decline.

Goldman Sachs' baseline in the report still includes another rate hike in December. However, the existing excerpt does not disclose the complete process of forecast adjustments, so it cannot be concluded that the firm has changed the timing or frequency of rate hikes due to this CPI.

Growth Drag Could Double, Key is When Rates Fall

Goldman Sachs' growth estimates are based on a clear rate path: another rate hike this year, followed by a decline in long-term rates, and then rate cuts later in 2027.

This means that its estimated 0.2 percentage points growth drag already includes the condition of a gradually easing financing environment in the future. If this condition cannot be met, the pressure on the economy will also increase.

Goldman Sachs estimates that if rates remain at current levels, the drag on U.S. GDP growth by 2027 will exceed twice the baseline scenario. Compared to a single rate hike, the persistence of high financing costs could have a more significant cumulative impact.

Understanding this difference requires distinguishing between policy rates and long-term market rates. The Federal Reserve directly influences short-term funding prices, while the costs of housing loans, corporate long-term financing, and investment projects are also affected by long-term market rates.

Therefore, even if the Federal Reserve stops raising rates, businesses and households may not immediately benefit from a decrease in financing costs. If long-term rates remain high, housing demand, corporate investment, and credit activity may still be under pressure.

It should be noted that the 0.2 percentage points is the growth drag estimated by Goldman Sachs' model, not a prediction of U.S. GDP growth rate, nor does it indicate that the total economic output will decline by 0.2%. The provided materials do not disclose the complete model settings, so specific losses in various industries cannot be further inferred.

Caption: Goldman Sachs' baseline assumption is that the Federal Reserve will raise rates once more in December, followed by three rate cuts starting in September 2027, with long-term rates expected to decline in the coming months. The image shows model estimates under different rate paths.

Whether Goldman Sachs' Baseline Holds Depends on Two Conditions

Goldman Sachs also expects another rate hike this year and a rate cut next year, reflecting a conditional policy path: short-term inflation still needs to be constrained, and then economic and price conditions gradually allow for policy adjustments.

However, this judgment requires the combination of two conditions.

First, core inflation must show more sustained easing. If price increases do not decline, or if energy costs further transmit to other goods and services, the duration of tightening may be extended. The timing of the expected rate cuts by Goldman Sachs will also face reassessment.

Second, long-term rates need to decline from current levels. This is an important assumption in Goldman Sachs' relatively mild growth drag estimate. If long-term rates remain high, even if policy rates are no longer continuously raised, financing costs may still continue to suppress demand.

From an asset pricing perspective, this requires investors to separately assess the policy shift and the improvement in the financing environment. Stopping rate hikes can alleviate concerns about further tightening, but whether growth pressures can ease will depend on whether actual borrowing costs decline.

The variables that need to be observed in the future are therefore clearer: whether core inflation continues to slow down, whether long-term rates decline, and whether housing, investment, and employment begin to show more significant pressures.

The 0.2 percentage points growth drag expected by Goldman Sachs is the result of the scenario where rates subsequently decline. If inflation stickiness forces financing costs to remain high for a longer time, the cost that the U.S. economy needs to pay may be significantly higher than this baseline.

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