The revision marks a significant shift in the bank’s outlook, placing the recession risk 10 percentage points above the long-term unconditional average. Economists led by Jan Hatzius noted that the conflict has triggered what they describe as the largest oil supply shock on record, surpassing the disruptions seen during the 1973 OPEC embargo and the 1990 Gulf War. This assessment comes 12 days after the initiation of military actions involving U.S. and Israeli forces against Iranian targets.
Geopolitical tensions have severely impacted energy markets, with Persian Gulf exports falling to roughly 3 percent of normal levels at the Strait of Hormuz. This disruption has occurred despite an emergency release of 400 million barrels of crude from international reserves, the largest such release in history, coordinated with the International Energy Agency.
Goldman Sachs analyst Manuel Abecasis identified oil prices as the primary transmission channel for the economic shock. Commodity strategists at the firm now expect Brent crude to average $98 per barrel through March and April, representing a 40 percent increase over the 2025 average. In a more severe scenario involving a month-long disruption of the Strait of Hormuz, the bank warned that Brent prices could surge to $145 per barrel.
Consequently, the firm raised its year-over-year headline Personal Consumption Expenditures inflation forecast for December 2026 to 2.9 percent, up from 2.1 percent. Core inflation is now projected at 2.4 percent, an increase of 20 basis points. The bank also adjusted its labor market expectations, forecasting that the unemployment rate will peak at 4.6 percent by the end of the year, up from the 4.4 percent reported in February.
Due to these inflationary pressures, Goldman Sachs postponed its expectation for the Federal Reserve’s first interest rate cut from June to September. The firm noted that a sustained 10 percent increase in oil prices typically boosts headline inflation by 0.2 percentage points while reducing GDP growth by approximately 0.1 percentage points.
Looking ahead, the bank’s baseline scenario assumes that oil flows through the Strait of Hormuz will begin to recover by March 21. However, economists cautioned that any extension of the disruption would add non-linear upside to inflation and further weigh on capital expenditure and hiring.
The Federal Reserve is now expected to reach a terminal rate of 3 percent to 3.25 percent by the end of 2026, with a second rate cut potentially occurring in December. Market participants are awaiting the next round of inflation data to determine if the labor market weakens more substantially than the current 4.6 percent projection.