Inflation rebounds, oil prices break above $100, Goldman Sachs and JPMorgan turn to expect a Fed rate hike this week

Goldman Sachs and JPMorgan now expect the Fed to raise rates this week. A string of stronger-than-expected inflation data has challenged hopes that "inflation pressures will continue to ease without further tightening of policy." Data released last week showed that both U.S. consumer prices and producer prices rose more than expected in August, while oil prices climbed above $100 a barrel as hostilities in the Middle East escalated again. After that, the two Wall Street banks joined a growing list of forecasters shifting to a more hawkish stance. In a report released last Friday, Goldman Sachs abandoned its previous forecast of "keeping rates unchanged" and now expects the Fed to raise rates by 25 basis points at its September 15-16 meeting. Meanwhile, JPMorgan predicts the Fed will raise rates by 25 basis points each in September and December. The latest data have reignited concerns that, after months of slowing inflation, the Fed's progress toward its 2% inflation target may stall. Goldman Sachs economist David Mericle said: "We believe the Federal Open Market Committee (FOMC) will be reluctant to surprise the market." After the inflation report was released, JPMorgan also struck a similar hawkish tone. JPMorgan economists led by Michael Feroli said in a report: "During this week, both bond yields and energy prices moved higher, and the inflation data were strong enough that the probability of a rate hike at next week's FOMC meeting is greater than that of no hike." This week, as policymakers wrap up their meeting on Wednesday, the prospect of further Fed tightening will be in focus; at the same time, investors are also watching for policy signals from the Bank of Japan. JPMorgan said the latest inflation data call into question the ongoing disinflation trend, so it predicts the Fed will raise rates again this year and has raised its forecast for the long-term policy rate to 3.25%. According to CME's FedWatch tool, the market now expects an 87% probability that the Fed will raise rates by 25 basis points this month, up from about 70% before the latest inflation data were released, and expects another rate hike in December. Goldman Sachs added in a separate research note last Sunday that, although later than previously forecast, it still expects the Fed to cut rates twice in 2027, because Goldman Sachs believes the rate hike expected this week is driven more by market pricing than by inflation fundamentals.