①Goldman Sachs believes the market has overestimated the risk of the Federal Reserve raising interest rates within the year, providing four reasons; ②Goldman Sachs argues that although international oil prices have risen due to the Iran war, the current supply chain shock is relatively small in scale and narrow in scope, unlike previous shocks that triggered inflation issues.
Since the outbreak of the Iran war, international oil prices have surged, driving up market expectations for rising inflation.
Against this backdrop, a growing number of market participants are concerned that the Federal Reserve will raise interest rates within the year—but Goldman Sachs disagrees.
The market has overestimated the risk of the Federal Reserve raising interest rates.
Since the outbreak of the war, the market has pushed the probability of the Federal Reserve raising interest rates in 2026 to about 45%, compared with only 12% before the Middle East conflict erupted. However, Goldman Sachs believes that market traders have overestimated the risk of the Fed tightening policy due to rising oil prices.
Goldman Sachs analyst Manuel Abecasis believes that the figure of 45% clearly overestimates the risk of the Federal Reserve raising interest rates and provided his own reasons for this assessment.
First, Goldman Sachs analysts argue that the supply chain shock brought about by the Iran war is 'relatively small in scale and narrow in scope' and not as severe as past shocks that triggered inflation issues.
Goldman Sachs specifically pointed out that, compared with the 1970s, the economy today is less dependent on oil, and supply disruptions are much more limited than during the supply chain crisis from 2021 to 2022.
Secondly, the bank also noted that prior to the outbreak of the war, the initial state of the U.S. economy provided a buffer against broader price pressures: the U.S. labor market was softening, wage growth was below levels consistent with a 2% inflation rate, and inflation expectations remained stable.
Goldman Sachs stated that these conditions make it unlikely for core inflation to experience large-scale spillover effects.
Third, Goldman Sachs further noted that the U.S. federal funds rate is already 50 to 75 basis points higher than the Federal Reserve's own estimate of the neutral rate.
Finally, Goldman Sachs also found that, historically, there is no significant correlation between oil price fluctuations and the Federal Reserve’s tightening policies.
Abecassis wrote:
"Our probability-weighted forecast for Federal Reserve policy remains significantly biased toward easing, far exceeding market expectations."
Editor/Doris