Goldman Sachs has outlined a path for two Fed rate cuts this year, but it all hinges on one critical factor: a swift de-escalation of the new conflict in the Middle East.
The core of their argument is about the duration of the recent oil price shock. Following U.S./Israeli strikes on Iran, oil prices jumped due to a 'war premium' as markets worried about disruptions in the Strait of Hormuz. A short-lived price spike is something the Federal Reserve (the Fed) can look past, as it won't meaningfully alter the long-term inflation trend.
However, if the conflict drags on and oil prices stay high, the story changes. A sustained 10% rise in oil can add roughly 0.4 percentage points to headline inflation. The recent 13% jump in an oil ETF, if it were to persist, could therefore push inflation significantly higher, forcing the Fed to delay any plans for rate cuts.
So, why does Goldman Sachs think a quick de-escalation is a plausible path? First, institutional buffers are in place. OPEC+ has significant spare production capacity it can bring online to stabilize supply. This acts as a powerful counterweight to the initial panic, limiting how high prices can go unless there's direct, lasting damage to infrastructure.
Second, this geopolitical shock didn't happen in a vacuum. Before the conflict flared up, the economic data was already pointing toward a cooling trend. Inflation was gradually falling closer to the Fed's 2% target, and wage growth was moderating. The Fed itself had signaled an easing bias, with some members already voting for a rate cut in January. This pre-existing disinflationary path makes it easier for the Fed to resume its plan to cut rates once the temporary oil shock fades.
In essence, Goldman Sachs is reframing its existing forecast. The path to two rate cuts in the second half of 2026 was already their base case. Now, that path depends on the Middle East conflict being a temporary storm, not a permanent change in the weather.
- Glossary
- Fed (Federal Reserve): The central bank of the United States, which sets monetary policy, including interest rates, to manage inflation and employment.
- War Premium: An additional amount added to the price of a commodity, like oil, due to the risk of supply disruptions from a war or geopolitical conflict.
- Headline CPI: A measure of inflation that includes all goods and services in an economy, including volatile items like food and energy.