Goldman Sachs is pushing back on one of the most significant shifts in market pricing this year. The bank says investors are overestimating the likelihood that the Federal Reserve will raise interest rates in response to the current oil price surge.
Surging energy prices and mounting stagflation fears have rattled global markets in recent weeks. At one point, futures markets implied a greater-than-even chance that the Fed would hike by year-end, according to CME Group’s FedWatch tool. Those odds have since pulled back to around 14%.
Goldman’s view is that the market reaction is overdone and out of line with history.
What Goldman’s note said
Strategist Dominic Wilson laid out the bank’s case in a note to clients. His argument is that the market has overreacted to an oil shock by pricing in a policy response that history suggests is unlikely to materialize.
“The market has priced a much larger hawkish shock than historical experience would suggest,” Wilson wrote. “We think the market is mispricing the policy distribution now, though the 1990 experience suggests the market could struggle to reverse that properly while oil prices are rising sharply.”
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The 1990 parallel is central to Goldman’s case. During that year’s oil supply shock, markets pushed yields sharply higher and priced in a hawkish Fed response. The Fed ultimately moved in the opposite direction, cutting rates as economic conditions deteriorated.
“So we have precedent for the market leaning heavily on the risk of higher rates, and demanding a sizable risk premium, even though the Fed ultimately cut rates sharply in that episode,” Goldman said.
Why Goldman sees cuts, not hikes
The bank’s core argument is that an oil-driven inflation spike is a supply-side shock, not a demand-side one. The Fed has historically tended to look through supply shocks rather than tighten in response to them. That tendency holds, especially when growth is already slowing.
As I reported previously, Goldman’s chief U.S. economist David Mericle has delayed the first cut to September from June, with a second cut in December. That is a delay, not a reversal. The bank still sees two cuts in 2026.
Goldman’s oil price baseline has Brent crude averaging $105 in March and $115 in April before retreating to $80 by year-end, per Fortune.
That assumes roughly six weeks of Strait of Hormuz supply disruptions. Under that path, the bank expects the oil shock to weigh on growth and eventually give the Fed reason to ease, not tighten.
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The market context behind the warning
The shift in market pricing has been dramatic. Traders moved from pricing in multiple Fed cuts at the start of the year to briefly pricing in a rate hike by year-end. The reversal was driven by oil prices topping $110 per barrel and inflation fears resurfacing.
CNBC reported that futures markets pushed the probability of a rate increase to 52% on March 27. That was the first time it had crossed the 50% threshold. The move has since partially reversed as traders absorbed Goldman’s pushback.
Goldman has also raised recession odds to 30%, up from 20% before the Iran war began. A slowing economy heading toward potential recession is not the environment in which the Fed has historically tightened policy.
Key points in Goldman’s view
- Markets overreacted. Futures briefly priced a greater-than-even chance of a rate hike by year-end. Goldman calls this a mispricing relative to historical norms.
- 1990 parallel. The last major oil shock of this type saw markets price in hikes that never came. The Fed cut instead as growth slowed.
- Supply shock, not demand shock. Goldman argues oil-driven inflation does not require a hawkish Fed response the way wage-driven inflation does.
- Two cuts are still expected. Goldman’s base case remains September and December cuts, delayed from June but not abandoned.
What Goldman’s pushback on oil means for investors
Goldman’s pushback matters because the Fed hike narrative has been one of the most disruptive forces in markets recently. If the bank is correct and the market is mispricing policy, a repricing back toward cuts could provide relief for equities and bonds.
The key variable is how long elevated oil prices persist. Goldman’s framework shows that a supply shock resolving within six weeks keeps the Fed on a cutting path. A shock that lasts longer and feeds into services inflation through transportation and logistics costs could change the calculus entirely.
For now, the bank is betting on historical precedent and a Fed that ultimately prioritizes slowing growth over oil-driven headline inflation.
Related: Goldman Sachs has a blunt message on oil prices and jobs