Still betting on rate hikes? Goldman Sachs: Referencing the 1990 oil crisis, the Federal Reserve will eventually cut rates!

Lianhe Caijing, March 31 (Editor: Bian Chun) As the Middle East conflict has ignited oil prices and heightened concerns about inflation, the global interest rate markets have recently seen a dramatic “hawkish repricing.” The market has shifted from initially pricing in multiple rate cuts by the Federal Reserve at the start of the year to pricing in rate hikes toward year-end.

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 will raise rates in response to the current surge in oil prices.

In recent weeks, a sharp rise in energy prices and growing worries about stagflation have continued to roil global markets. According to the FedWatch tool of the CME Group, the futures market’s pricing at one point suggested there was more than a 50% chance that the Federal Reserve would raise rates before the end of the year. However, this probability has now fallen to around 14%.

Goldman Sachs believes the market reaction (its rate-hike expectations) is excessive and does not match historical experience.

In a research report, Goldman Sachs strategist Dominic Wilson laid out the firm’s view: The market has overreacted to the oil shock, pricing in a tightening policy from the Federal Reserve, and based on historical experience, this is unlikely to happen in most cases.

Wilson wrote: “At present, market pricing reflects a more intense hawkish shock than historical experience suggests. We think the market is incorrectly pricing the policy path. However, based on the precedent from 1990, during periods of a sharp rise in oil prices, markets often struggle to correctly adjust expectations.”

The historical reference from 1990 is at the core of Goldman Sachs’ judgment. That year, when faced with an oil supply shock, bond yields surged sharply, and investors bet that the Federal Reserve would tighten policy. But ultimately, the Federal Reserve did the opposite—choosing to cut rates as the economic outlook deteriorated.

Goldman Sachs said: “Historical precedent indicates that the market will strongly tilt toward the risk of rate hikes and demand a substantial risk premium—even if the Federal Reserve ultimately cut rates significantly in that episode.”

So why does Goldman Sachs expect rate cuts instead of rate hikes?

The firm’s core logic is: inflation surging driven by oil prices is a supply-side shock, not an overheating on the demand side. Historically, 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 latest remarks from Federal Reserve Chair Jerome Powell also appear to support Goldman Sachs’ view. On Monday, Powell said that against the backdrop of the U.S. and Iran war-driven energy shock, the Federal Reserve tends to keep rates unchanged and temporarily “ignore” the impact of this shock,

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

On oil prices, Goldman Sachs’ baseline forecast is that the Brent crude oil average for March will be $105, for April $115, and then will fall back to $80 before year-end.

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

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

“The Fed rate hikes” narrative has been one of the most destructive forces disrupting markets in recent times. If Goldman Sachs is right—if the market is indeed mispricing the Federal Reserve’s policy path—then as expectations return to the main theme of rate cuts, it could give some breathing room to the stock and bond markets.

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责任编辑：郭建