After the release of U.S. September inflation data, market discussion is shifting from whether the Federal Reserve will hike rates again to how long rates will remain elevated. The U.S. Consumer Price Index rose 0.6% month-on-month and 3.7% year-on-year in September, with gasoline prices up 9.1% on a monthly basis and acting as the main driver of overall inflation.
Energy prices have a direct impact on the headline reading, but core inflation also showed no clear signs of cooling. The core CPI, which excludes food and energy, rose 0.3% month-on-month for the second consecutive month, while shelter-related price gains accelerated from 0.3% in August to 0.4%. For the Federal Reserve, energy prices can lift headline inflation quickly, but whether core inflation can continue to ease remains a key gauge of whether underlying price pressures are receding.
Goldman Sachs’ baseline scenario assumes the Fed will deliver one more rate hike in December this year, followed by three consecutive cuts starting in September 2027, with long-term rates declining from current levels over the coming months. Under that path, elevated rates would weigh on U.S. economic growth in 2027 by about 0.2 percentage points. If rates remain at current levels for an extended period, the drag could expand to more than double the baseline estimate.
The contrast between the two scenarios is prompting markets to place greater emphasis on the persistence of financing costs. Policy rates mainly affect short-term funding prices, while mortgage rates, corporate medium- and long-term financing costs and project investment costs are also influenced by long-term market rates. Even if the Fed stops hiking, if long-term rates do not fall meaningfully, household home-buying spending, corporate capital expenditure and credit activity may continue to come under pressure. Going forward, whether core inflation can ease for a sustained period, whether long-term rates decline, and whether housing, investment and employment data show clearer signs of weakness will all shape market views on the cost of tighter policy.
