Goldman Sachs: bond traders price 75% odds of Fed rate hike by end 2026

The inflation catalyst

An ongoing conflict in Iran has pushed Brent crude oil prices from the low $70s to near $100 per barrel, a roughly 40% increase that's feeding into broader inflation expectations. Core inflation is running around 3%, combined with strong economic indicators, making the Fed's job significantly harder.

The market's repricing has been dramatic. Market-implied probability of a rate hike in 2026 has jumped to approximately 45%, up from just 12% before the Iran conflict escalated. The federal funds rate currently sits between 3.5% and 3.75%.

Goldman's revised forecast

Goldman Sachs has revised its forecast, pushing its anticipated rate cut timeline out to June and December of 2027. The bank now expects two 25 basis point cuts that would bring the terminal rate to a range of 3% to 3.25%. This means at least another 12 to 18 months of elevated borrowing costs.

For most of 2025, the market consensus was that the Federal Reserve would keep cutting rates, but that consensus is now dead.

"Goldman Sachs has cautioned against overselling rate hike bets, suggesting that the inflation dynamics are heavily influenced by supply shocks rather than straightforward economic overheating." — Goldman Sachs

Implications for risk assets

The rate-hike narrative hits speculative assets hard. Bitcoin recently traded near $62,000 amid heightened risk-off sentiment tied to these macroeconomic factors. Higher interest rates, or even the expectation of them, create a gravitational pull away from speculative assets. When Treasury yields rise, the opportunity cost of holding non-yielding assets increases.

History offers a cautionary frame. During the 2022-2023 tightening cycle, Bitcoin fell from nearly $69,000 to below $16,000. Extended rate expectations could keep pressure on risk appetite through 2027.