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

China Financial News April 2 (Edited by Liu Rui) Since the outbreak of the Iran war, international oil prices have surged rapidly, stoking market expectations of accelerating inflation.

Against this backdrop, more and more market participants are worried that the Federal Reserve will raise rates within the year—however, Goldman Sachs does not agree.

The market is overestimating the risk of the Federal Reserve raising rates

Since the outbreak of the war, the market has pushed the probability of the Federal Reserve raising rates during 2026 to about 45%, compared with just 12% before the outbreak of the conflict in the Middle East. But Goldman Sachs believes market traders are overestimating the risk that higher oil prices will force the Fed to tighten policy.

Goldman Sachs analyst Manuel Abecasis said that the figure of 45% clearly overstates the risk of the Federal Reserve raising rates, and he provided his own reasons.

First, Goldman Sachs analysts believe the supply-chain shock brought by the Iran war is “smaller in scale and narrower in scope” and not as severe as the shocks in the past that triggered inflation problems.

Goldman Sachs specifically pointed out that, compared with the 1970s, the current economy is less dependent on oil, and the extent of supply disruptions is far more limited than the supply-chain crisis of 2021 to 2022.

Second, the bank also noted 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 weakening, wage growth is below the pace consistent with a 2% inflation rate, and inflation expectations remain stable.

Goldman Sachs said these factors make it unlikely that core inflation will spill over meaningfully at scale.

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 if you look back historically, there is actually no clear historical link between oil price volatility and the Fed’s tightening policy.

Abecasis wrote:

“Our probability-weighted calculation of the Fed policy outlook still clearly leans toward a more accommodative stance, far beyond market expectations.”