Goldman Sachs on Upcoming Fed Rate Decision - FJElite
Market pricing implies that investors see the outcome of the July meeting as unusually uncertain. If current pricing implying a roughly 40% chance of a hike persists going into the meeting, either outcome would be the largest surprise in a few decades at a meeting where the Fed hiked or held (Exhibit 2), because the Fed has historically avoided delivering surprise rate hikes at its meetings.
The market uncertainty likely reflects that Chairman Warsh’s approach is sufficiently different to raise doubts about whether historical patterns still apply, that his own position on hiking remains unclear, that the FOMC has been split recently, that some of the re-escalation with Iran occurred during the blackout period, and that further escalation is possible before Wednesday. While we agree that the uncertainty is greater than usual, most voters appear unlikely to push for a hike next week after the softer June inflation data, and some might be especially reluctant to deliver a surprise hike at a meeting without a Summary of Economic Projections out of fear that the market might infer more than they intended.
Despite the rebound in oil prices, we continue to think that the combined impact of tariffs, the war, and AI effects on monthly inflation should diminish in the months ahead, leaving core inflation soft enough for the FOMC to stay on hold through the end of the year.
