Goldman Sachs on FOMC - FJElite
The FOMC is likely to keep the funds rate unchanged and drop the previous forward guidance suggesting cuts. The most important change in the economic data since the last FOMC meeting is the impressive pick-up in job growth that has put the labor market on a sturdier trajectory. This has left the focus on whether the inflation situation is becoming concerning enough to warrant a rate hike. The war and the increase in oil prices will likely drive headline PCE inflation above 4% and leave core PCE inflation above 3% all year. But so far the impact on inflation looks more like the usual passthrough from large oil shocks than the pandemic's wide-ranging shortages and price spikes. We continue to see rate hikes as unlikely, both because the Fed has usually not hiked in response to oil price shocks in the past, and because conditions today, especially the more balanced state of the labor market, make it less likely that the oil shock will spark self-sustaining high inflation. That said, there have been some concerning signs already, and meaningful increases in inflation expectations or the breadth of high inflation across categories would make a hike more likely.
We expect the 2026 median dot to settle at 3.625%, with roughly 4-5 dots clustered at 3.875% and risks skewing hawkish both on the median (risk of a split vote, particularly if Warsh removes Miran’s dot). With year-end core PCE projected at 3.4%, market pricing should remain anchored close to 3.875%, preserving the hike premium even after the peace deal. This is predicated on Warsh striking a mildly hawkish tone to manage long-end yields, lean against risk-asset strength, acknowledge resilient employment data, and respect persistent inflation uncertainty. Whilst questions will come on a smaller FOMC, balance sheet reduction and forward guidance elimination, we don’t expect him to tackle this Wednesday as work is already underway on reserve demand. If he mentions changing the target rate from Fed funds rate to TGCR, it’s a clear signal that they will cut IOER down the road.
We expect a balanced statement. Market consensus shifted to a balanced statement after Waller’s speech in May: “Based on this recent data, I would support removing the 'easing bias' language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase." Maintaining a dovish tilt would likely lead to several dissents, surprising the market and introducing unwanted volatility at Warsh’s first meeting. The range of outcomes for the Press Conference is somewhat wider. We expect Warsh to acknowledge that inflation remains above target and the labor market is stable, however holding the funds rate steady will give the Fed more time to evaluate if a policy adjustment is needed. Flowever, there is risk Warsh talks down local inflationary pressures as a one-off supply driven event, and comes across as too dovish. This would put cheapening pressure on the long end of the curve. With Fed pricing just above one 25bp hike over the next several quarters, we think the scope for a meaningful rally is limited. It will likely take a weakening of the labor market to shift the market’s expectations towards cuts over hikes in the near term.