Editor's note: U.S. inflation is heating up again, and the Federal Reserve's rate hike question has once again become a market focus. Data released on October 14 showed that U.S. CPI rose 0.6% month-on-month in September and 3.7% year-on-year. Gasoline prices contributed more than half of the monthly increase, but after excluding food and energy, core CPI still rose 0.3% month-on-month, unchanged from August, and underlying price pressures have not yet further eased.

Sticky inflation gives reason to continue tightening, but elevated financing costs are also building up growth pressures. For the market, whether there will be another rate hike next time is only the immediate question: the longer-term variable is how long rates will stay high, and how long businesses and households will need to bear high financing costs.

Goldman Sachs' baseline in its macro research brief is that the Federal Reserve will raise rates once more in December, followed by three rate cuts starting in September 2027, while long-term rates will fall back in the coming months. Under this scenario, Goldman Sachs estimates that higher rates will drag down U.S. GDP growth by about 0.2 percentage points in 2027; if rates remain at current levels, the drag will be more than double that figure.

This means that Goldman Sachs' judgment that the growth cost is relatively limited depends on subsequent rate declines. If inflation does not recede for a long time and long-term financing costs remain persistently high, the market will need to reassess not only how much more the Federal Reserve will raise rates, but also how long the U.S. economy can withstand it.

The following is a translation of the original text:

After inflation came in above expectations, the market is re-examining the Federal Reserve's rate hike path. But the scenario analysis provided by Goldman Sachs pushes the question further toward growth: rates have already risen to high levels, and how long they stay there could significantly change the economic cost of tightening.

According to the report content provided, Goldman Sachs still expects the Federal Reserve to raise rates once more in December, followed by three rate cuts starting in September 2027. At the same time, its baseline assumption is that long-term rates will fall back from current levels in the coming months.

Under this path, Goldman Sachs estimates that higher rates will drag down U.S. GDP growth by about 0.2 percentage points in 2027. If rates remain at current levels, the drag will expand to more than twice the baseline estimate.

The gap between the two scenarios reveals the report's most important judgment: future growth pressure depends both on what the Federal Reserve does next and on whether market financing costs can decline accordingly.

Core inflation has not cooled, and the Federal Reserve still finds it hard to ease

U.S. inflation rose in September, with energy as the main driver. Gasoline prices rose 9.1% month-on-month, pushing the monthly increase in headline CPI from 0.4% in August to 0.6%.

But price pressures were not entirely concentrated in energy. Core CPI rose 0.3% month-over-month for a second consecutive month, while housing price gains accelerated from 0.3% in August to 0.4%. This makes it difficult for the market to explain the inflation performance solely through gasoline price fluctuations.

For the Federal Reserve, the key question is whether price increases can be sustained. Energy prices can quickly push up headline inflation, and their follow-through effects depend on price trends and cost pass-through; whether core inflation can steadily moderate is tied to policymakers' assessment of underlying price pressures.

This data alone is not sufficient to determine the subsequent policy path, but the absence of further cooling in core inflation means more evidence is still needed to judge that inflation is on a sustained downward trend.

Goldman Sachs' baseline in its report still includes one more rate hike in December. However, the available excerpt does not disclose the full process of forecast adjustments, so it cannot be concluded that the bank changed the timing or number of rate hikes because of this CPI reading.

Growth drag could double, and the key is when rates fall

Goldman Sachs' growth estimate is built on a clear rate path: one more hike within the year, long-term rates subsequently declining, and rate cuts beginning in late 2027.

This means its estimated 0.2 percentage point growth drag already incorporates the condition of a gradually easing future financing environment. If that condition fails to materialize, the pressure on the economy will increase accordingly.

Goldman Sachs estimates that if rates remain at current levels, the drag on 2027 U.S. GDP growth would be more than double the baseline scenario. Compared with a single rate hike, the persistence of high financing costs could bring a larger cumulative impact.

Understanding this difference requires distinguishing between the policy rate and long-term market rates. The Federal Reserve directly influences short-term funding costs, while the cost of funds for mortgages, long-term corporate financing, and investment projects is also affected by long-term market rates.

Therefore, even if the Federal Reserve ends its rate hikes, businesses and households may not immediately receive relief from lower financing costs. If long-term rates remain elevated, housing demand, business investment, and credit activity could still come under pressure.

It should be made clear that 0.2 percentage points is the growth drag estimated by Goldman Sachs' model, not a forecast for U.S. GDP growth, nor does it mean that total economic output will decline by 0.2%. The provided materials do not disclose the full model specifications, so specific losses by industry cannot be further calculated.

Chart note: Goldman Sachs' baseline assumes the Federal Reserve will hike rates once more in December, then cut rates three times starting in September 2027, with long-term rates falling from current levels in the coming months. The chart shows model estimates under different rate paths.

Whether Goldman Sachs's baseline holds depends on two conditions

Goldman Sachs simultaneously expects another rate hike within the year and a rate cut the following year, reflecting a conditional policy path: short-term inflation still needs to be restrained, after which economic and price conditions will gradually allow for policy adjustment.

But this judgment requires two conditions to align.

First, core inflation must show more sustained easing. If price increases remain stubbornly high, or if energy costs further pass through to other goods and services, the period of tightening could be extended. The timing of rate cuts that Goldman Sachs expects would also face reassessment.

Second, long-term interest rates need to fall back from current levels. This is an important assumption in Goldman Sachs's relatively mild growth drag estimate. If long-term rates remain elevated, even if the policy rate is no longer raised consecutively, financing costs could still continue to weigh on demand.

From an asset pricing perspective, this requires investors to separately assess the policy pivot and the improvement in the financing environment. A halt to rate hikes can ease concerns about further tightening, but whether growth pressure can be alleviated still depends on whether actual borrowing costs decline.

The variables that need to be watched going forward are therefore clearer: whether core inflation continues to slow, whether long-term rates fall back, and whether housing, investment, and employment begin to show more pronounced pressure.

The 0.2 percentage point growth drag that Goldman Sachs expects is the result under a scenario in which rates subsequently fall back. If inflation stickiness forces financing costs to remain elevated for longer, the price the U.S. economy needs to pay could be significantly higher than this baseline.

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