US inflation "still running hot"! Goldman Sachs is the first to change its tune: the Fed's rate-hike cycle is not over yet, and another 25 basis points may come in March next year.

Tuesday's higher-than-expected US October CPI data prompted Goldman Sachs to revise its earlier forecast that the Fed's current rate-hike cycle would end in December. The Wall Street financial giant now expects the Fed to raise rates by another 25 basis points in March next year. Both the monthly headline and core CPI for October came in above market expectations, indicating that price pressures remain elevated and reinforcing the case for the Fed to continue raising rates. Data released Tuesday by the US Bureau of Labor Statistics (BLS) showed that US October CPI rose 0.4% month-on-month, above the market expectation of 0.3%, with the previous reading at 0.6%; core CPI, which excludes volatile items such as energy and food, rose 0.3% month-on-month, above the market expectation of 0.2%, with the previous reading at 0.3% (no year-on-year data were available for October CPI and core CPI because the US federal government shutdown in October last year resulted in missing CPI data). This CPI report is the last CPI data before the Fed's December 8-9 policy meeting (November CPI is scheduled for release on December 10, the day after the decision, at which point year-on-year figures will resume). Last week's October nonfarm payrolls showed 165,000 new jobs, far exceeding expectations, and the unemployment rate fell to 4.1%. Combined with the absence of any cooling in core inflation this time, market focus has shifted to whether the December rate hike will be 25 or 50 basis points. After the release of the US October CPI data, the market increased its bets on Fed rate hikes. In addition to pricing in a near-100% probability of a December rate hike, the market raised its bets on a 50-basis-point hike next month and further increased wagers that the Fed will raise rates at least twice before mid-2027. Goldman Sachs is the first among its peers to adjust its forecast. Goldman believes the Fed is more likely to raise rates again in March next year than in January. The bank expects inflation to ease somewhat by the end of this year, but with seasonal price pressures re-emerging in early next year and costs remaining elevated, inflation could rise again. David Mericle, Goldman Sachs' chief US economist, said: "By the time of the March meeting, and possibly even the January meeting, the energy shock may have largely passed. But we suspect that the recent inflation data will prompt most FOMC members to signal in the December dot plot that a third rate hike is coming." In addition, Goldman Sachs now expects the Fed to begin cutting rates in December 2027, three months later than its previous forecast. Goldman also expects the Fed to cut rates further in March, June and September 2028. It is worth noting that the latest October CPI data coincided exactly with the threshold for a larger rate hike that Fed Governor Waller mentioned on Tuesday. Waller said Tuesday that he supports a December rate hike and warned that if inflation continues to accelerate, he would support a 50-basis-point hike to preserve the Fed's credibility. Waller said that despite a strong economy and a stable labor market, inflation remains too high. "If, as I expect, October inflation improves on a month-on-month basis, I would lean toward supporting a 25-basis-point increase in the policy rate," Waller said. "But if the October CPI data released later today are similar to the readings of the past two monthswith core CPI inflation around 0.3% or higherthen stronger policy action may be needed. In that case, I think a 50-basis-point hike should be considered at the December meeting." Waller's blunt remarks are the strongest signal yet from a Fed official that policymakers not only need to raise rates in December but may need to do so by more than the 25 basis points the market expects. Chicago Fed President Austan Goolsbee, a 2027 FOMC voter, said in an interview on Tuesday that the latest inflation report was "worryingalmost arguably overheating inflation is very disturbing." His biggest concern is that tariff and energy shocks have yet to fully fade and services inflation remains persistently high. However, he did not explicitly support a 50-basis-point hike in December, instead stressing that no policy option should be ruled out in advance. Philadelphia Fed President Anna Paulson was more cautious by comparison. She supports raising rates at a gradual pace, saying that "for now, continuing to tighten policy gradually is appropriate." She also noted that upward wage pressures remain limited and that inflation expectations remain consistent with the central bank's 2% inflation target. Paulson said: "Skipping a rate hike is merely adjusting the pace of hikes, not a pivot. There will likely still be room for tightening ahead. But where conditions allow, I prefer gradual tightening." She further explained that slowing the pace of hikes gives households, businesses and the financial sector time to adjust and gives policymakers room to keep assessing economic data. "A gradual path works best when the direction of policy is well understood by the market. If the market already expects more tightening, gradual hikes will not leave us behind the policy target," she said.