Goldman Sachs: The market has overestimated the risk of Fed rate hikes; the impact of the war shock isn't that significant.

Ask AI · How does Goldman Sachs argue that the impact of war shocks on inflation is limited?

Cailian Press, April 2 (Editor Liu Rui) Since the outbreak of the Iran war, international oil prices have risen rapidly, boosting market expectations of rising inflation.

Against this backdrop, more and more market participants fear that the Federal Reserve will raise interest rates within the year — but Goldman Sachs disagrees.

Market overestimates the risk of Fed rate hikes

Since the outbreak of the war, the market has increased the probability of the Federal Reserve raising rates within 2026 to about 45%, whereas before the Middle East conflict, this probability was only 12%. But Goldman Sachs believes that traders in the market have overestimated the risk that rising oil prices will force the Fed to tighten policy.

Goldman Sachs analyst Manuel Abecasis believes that the 45% figure clearly overestimates the risk of a rate hike by the Fed, and he provides his reasons.

First, Goldman Sachs analysts believe that the supply chain shocks caused by the current Iran war are “relatively small in scale and narrow in scope,” and are not as severe as the shocks that previously triggered inflation problems.

Goldman Sachs specifically points out that compared to the 1970s, the economy today is less dependent on oil, and supply disruptions are much more limited than during the supply chain crisis of 2021-2022.

Second, the bank also notes that before the war broke out, the initial condition of the U.S. economy provided a buffer against broader price pressures: the U.S. labor market is softening, wage growth is below the level consistent with a 2% inflation rate, and inflation expectations remain stable.

Goldman Sachs states that these conditions make a large-scale spillover of core inflation unlikely.

Third, Goldman Sachs further points out that the federal funds rate in the U.S. is already 50 to 75 basis points above the Fed’s own estimate of the neutral rate.

Finally, Goldman Sachs also finds that, historically, there is no clear correlation between oil price fluctuations and Fed tightening policies.

Abecasis wrote:

“Our probability-weighted forecast of Fed policy remains clearly tilted toward easing, far exceeding market expectations.”

(Cailian Press, Liu Rui)