Still Betting on Hikes? Goldman Sachs Points to 1990 Oil Crisis as Precedent for Fed Cuts
As the conflict in the Middle East ignites oil prices and rekindles inflationary fears, global interest rate markets have undergone a dramatic "hawkish repricing." Investors have shifted from betting on multiple Federal Reserve rate cuts at the start of the year to pricing in a year-end hike.
Goldman Sachs is now challenging this pivot—one of the most significant shifts in market pricing this year—arguing that investors are overestimating the likelihood of the Fed raising rates in response to the current energy surge.
In recent weeks, surging energy costs and rising stagflation jitters have rattled global markets. According to the CME Group’s FedWatch Tool, futures market pricing briefly implied a more than 50% probability of a Fed hike by year-end. While that probability has since retreated to approximately 14%, Goldman Sachs contends the market reaction remains excessive and inconsistent with historical experience.
The 1990 Precedent
In a research note, Goldman strategist Dominic Wilson articulated the firm’s view that the market has overshot in betting on a contractionary Fed policy. "Current market pricing reflects a more severe hawkish impulse than historical experience would suggest," Wilson wrote. "We believe the market is mispricing the policy path. However, referencing the 1990 precedent, the market often struggles to correctly revise expectations during significant oil price spikes."
The 1990 oil supply shock serves as the cornerstone of Goldman’s thesis. During that period, bond yields skyrocketed as investors bet on a Fed tightening cycle. Instead, the Federal Reserve did the opposite—cutting interest rates as economic conditions deteriorated. Goldman noted, "Historical precedent shows the market leans heavily toward hike risks and demands a substantial risk premium, even though the Fed ended up cutting rates significantly during that event."
Goldman’s core logic is that the oil-driven inflationary spike constitutes a supply-side shock rather than demand-side overheating. Historically, the Fed tends to "look through" supply-side inflationary pressures, especially when economic growth is already slowing.
This view was bolstered Monday by Fed Chair Jerome Powell, who indicated that the central bank prefers to maintain current rates and temporarily "ignore" the impact of the energy shock triggered by the U.S.-Israel-Iran hostilities.
Goldman’s Chief U.S. Economist, David Mericle, recently pushed back the forecast for the first Fed rate cut from June to September, with a second cut expected in December. This represents a delay in the easing cycle rather than a total reversal of stance; the firm maintains its baseline forecast for two additional cuts in 2026.
Regarding crude prices, Goldman’s baseline forecast projects Brent averaging $105 in March and $115 in April, before retreating to $80 by year-end. This trajectory assumes a six-week disruption in the Strait of Hormuz. Under this path, the bank expects the oil shock to drag on economic growth, ultimately prompting the Fed to ease policy to support the economy.
Furthermore, Goldman has raised its probability of a U.S. recession to 30%, up from 20% prior to the outbreak of the war. A slowing economy on the brink of recession has historically never been an environment where the Fed chooses to tighten. If Goldman’s assessment is correct and the market returns to a "rate cut" narrative, it could provide a much-needed reprieve for both equity and bond markets.
* Recession Watch: Goldman raises U.S. recession odds to 30%. 🚨
Is the "Higher for Longer" fear overblown? If the narrative shifts back to cuts, the stock market might finally find its bottom. #Fed #Inflation #GoldmanSachs #OilPrice #Macro #Trading