GS US Economics Analyst - FJElite

The inflation data have improved but the geopolitical news has worsened in recent weeks. We expect the -2bp core CPI print for June to translate to 18bp on core PCE and mark the start of a softer trend. We also expect the BEA’s recently announced methodological changes designed in part to fix the mismeasurement of AI effects to shave 0.2pp off of year-over-year inflation. But the re-escalation of the war with Iran and attacks on Russian oil refineries have pushed energy prices higher and revived fears that the already lengthy series of supply shocks could continue.

We expect the FOMC to leave the fed funds rate unchanged at its July meeting next week. The statement might acknowledge the upside risks to inflation posed by renewed geopolitical conflict, and there will likely be at least one dissent in favor of a hike.

Market pricing implies that investors see the outcome of the July meeting as unusually uncertain, likely because the FOMC has been split recently, Chairman Warsh’s own position remains unclear, and some of the re-escalation with Iran occurred during the blackout period. But most voters appear unlikely to push for a hike next week after the softer June inflation data, the Fed has historically avoided delivering surprise rate hikes, and we suspect that voters might be especially reluctant to do so at a meeting without a Summary of Economic Projections.

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.

But comments from FOMC participants indicate that many could support hiking if the inflation news is worse than we expect. As a result, as we noted when the re-escalation with Iran began, we see little margin for error on inflation and suspect that continued conflict could influence the rate hike debate more than the oil passthrough math alone implies by adding to concerns that supply shocks could continue and can come back unpredictably even after they appear over.