Goldman Sachs: Fed Will Eventually Cut Rates, Referencing 1990 Oil Crisis

On March 31, as conflicts in the Middle East triggered a surge in oil prices and raised inflation concerns, the global interest rate market experienced a dramatic “hawkish repricing”—shifting from expectations of multiple rate cuts by the Federal Reserve at the beginning of the year to pricing in rate hikes by the end of the year. Goldman Sachs is questioning this significant shift in market pricing for the year. The bank stated that investors are overestimating the likelihood of the Federal Reserve raising rates in response to the current spike in oil prices. Goldman Sachs strategist Dominic Wilson elaborated on the bank’s viewpoint in a research report: the market is overreacting to the oil shock, betting on the Fed to implement tightening policies, whereas historical experience suggests that this is unlikely to happen. The historical reference from 1990 is central to Goldman Sachs’ judgment. During that year, when faced with an oil supply shock, bond market yields soared, and investors bet on the Fed tightening policy. However, the Fed ultimately took the opposite approach, choosing to cut rates amid a deteriorating economic situation. Goldman Sachs’ core logic is that inflation driven by rising oil prices is a supply-side shock rather than a demand-side overheating. Historically, the Fed tends to ignore supply-side inflation pressures and does not tighten monetary policy as a result. This tendency becomes more pronounced when economic growth is already slowing.