Goldman Sachs: Referencing the 1990 oil crisis, the Federal Reserve will eventually cut interest rates

Caixin Global

Goldman Sachs is questioning one of the most significant market-pricing shifts this year. The firm said investors have overestimated the likelihood that the Federal Reserve would raise interest rates in response to the current surge in oil prices.

In recent weeks, energy prices have jumped sharply and fears of stagflation have intensified, continuing to disrupt global markets. According to the CME Group “FedWatch” tool, at one point the futures market pricing suggested that the likelihood of the Federal Reserve raising rates before year-end was above 50%. However, this probability has since fallen back to around 14%.

Goldman Sachs believes the market reaction (rate-hike bets) has been overdone and does not match historical experience.

In a research note, Goldman strategist Dominic Wilson laid out the firm’s view: the market is overreacting to the oil shock, betting that the Federal Reserve will implement tightening policy, whereas—judging by historical experience—this is unlikely to happen.

Wilson wrote: “At present, market pricing reflects a more severe hawkish shock than what we see in historical experience. We believe the market is incorrectly pricing the policy path. However, looking back at the precedent from 1990, during periods when oil prices surged significantly, the market often struggled to revise expectations correctly.”

The historical reference point from 1990 is the core of Goldman’s judgment. That year, when faced with an oil supply shock, bond market yields jumped sharply and investors bet that the Federal Reserve would tighten policy. But in the end, the Federal Reserve did the opposite and chose to cut rates as economic conditions deteriorated.

Goldman said: “Historical precedents indicate that markets will strongly lean toward the risk of rate hikes and demand a sizable risk premium, even if the Federal Reserve ultimately cut rates sharply in that episode.”

Why does Goldman expect rate cuts, not rate hikes?

Goldman’s key logic is that inflation driven by oil prices is surging and is a supply-side shock rather than demand-side overheating. From history, the Federal Reserve typically ignores supply-side inflation pressures and does not tighten monetary policy because of them. When economic growth is already slowing, this tendency becomes even more pronounced.

The Federal Reserve Chair Jerome Powell’s latest remarks also appear to support Goldman’s view. On Monday, Powell said that amid an energy shock triggered by the Israel-U.S. war with Iran, the Federal Reserve is inclined to keep interest rates unchanged and temporarily “ignore” the impact of the shock,

Goldman’s chief U.S. economist, David Mericle, has recently pushed back its forecast for the timing of the Federal Reserve’s first rate cut from June to September, and expects the central bank to deliver a second rate cut in December this year. This is simply a delay in the pace of rate cuts, not a complete shift in direction. The firm still maintains its baseline view that the Federal Reserve will cut rates twice in 2026.

On the oil front, Goldman’s baseline forecast is that the Brent crude 3-month average price will be $105, $115 in April, and then will fall back to $80 before year-end.

This forecast assumes that the disruption to supply across the Strait of Hormuz will last about six weeks. Under this path, the firm expects the oil shock to weigh on economic growth and ultimately lead the Federal Reserve to ease policy rather than tighten it.

In addition, Goldman has raised its probability of a U.S. economic recession, from 20% before the start of the war between Iran and Israel to 30%. An economic environment of slowing growth and nearing recession has, historically, never been the time when the Federal Reserve would tighten policy.

“The narrative of ‘Federal Reserve rate hikes’ has been one of the most destructive forces disturbing markets recently. If Goldman’s assessment is correct—if the market is indeed incorrectly pricing the Federal Reserve’s policy path—then as expectations revert to the main theme of rate cuts, it could give the equity and bond markets a chance to catch their breath.”

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责任编辑：郭建