Goldman Sachs has published a research report stating that the most significant shift in economic data since the last FOMC meeting has been a substantial rebound in job growth, placing the labor market on a firmer footing. This has shifted market focus to whether inflation conditions have deteriorated sufficiently to justify a rate increase. However, Goldman Sachs believes the likelihood of a hike is not high.
The firm points to two key reasons: historically, the Federal Reserve has typically not raised interest rates in response to oil price shocks, and the current environment reduces the probability of such a shock triggering a self-reinforcing cycle of high inflation. That said, some concerning signals have emerged. The possibility of a rate increase would rise significantly if there is a marked uptick in inflation expectations or a broadening in the range of categories experiencing high inflation.
Goldman Sachs anticipates that at the upcoming June meeting—the first under the new Chair—the FOMC is very likely to keep the federal funds rate unchanged. The committee is also expected to remove the prior forward guidance that hinted at potential rate cuts.
The bank expects the meeting statement to remove only the phrase concerning "the extent and timing of any additional adjustments" to the federal funds rate. The median projection in the updated "dot plot" is expected to show the federal funds rate holding steady through 2026, with three committee members forecasting a rate hike later this year.
Nevertheless, Goldman Sachs projects the median dot will still indicate two eventual rate cuts, most likely occurring in 2027 and 2028. While some individual projections for the neutral rate may shift higher, the median is unlikely to rise. The bank assumes that the new Chair, Warsh, will not submit a dot plot, given his past criticisms of forward guidance.
Comments