Goldman Sachs: If inflation cools rapidly, the FOMC is more likely to maintain or lower rates

Overview

This report is Goldman Sachs's macroeconomic commentary on the minutes of the U.S. FOMC's June meeting. The minutes show broad consensus within the FOMC for keeping current rates unchanged, but the future policy direction depends on whether inflation falls rapidly. The report also provides Goldman Sachs's forecasts for core PCE and core CPI and maintains the baseline view that the policy rate will remain unchanged in 2026.

Core views

The core view is that, on the one hand, the FOMC remains concerned that inflation is above the 2% target, while tariffs, supply-chain disruptions, energy prices, and AI-related investment demand could make price pressures more persistent; on the other hand, if inflation pressures subside and begin returning to 2%, policymakers would be more inclined to maintain or eventually lower the federal funds rate. Goldman Sachs believes there is still a risk of rate hikes during the year, but this is not its baseline case.

Analysis framework

The report primarily assesses the policy reaction function by interpreting participants' statements in the FOMC minutes, focusing on differences in policy preferences under various inflation scenarios and incorporating Goldman Sachs's forecasts for core PCE, core CPI, the labor market, and growth momentum to form its interest-rate outlook.

Methodology notes

• Macroeconomic policy analysisScenario analysis of the FOMC minutes

  Assess the strength of policy consensus based on wording such as 'all,' 'most,' 'almost all,' and 'a few' in the minutes.

  The report identifies the policy committee's degree of support for maintaining rates, potential rate cuts, and further tightening by analyzing participants' wording.

• Inflation forecastCore PCE and core CPI path forecasts

  Use core PCE and core CPI as key inflation indicators for assessing pressure on Federal Reserve policy.

  Goldman Sachs expects year-over-year core PCE inflation to decline from the current 3.4% to 3.0% in December 2026, and year-over-year core CPI inflation to decline from the current 2.9% to 2.6% in December 2026. It also believes that monthly core CPI readings will remain relatively moderate over the coming months.

• Policy reaction functionInterest-rate path under inflation scenarios

  Different inflation scenarios correspond to different interest-rate policy choices.

  If inflation falls rapidly, policy may remain unchanged or ease; if inflation remains elevated due to AI demand, geopolitical conflict, or tariffs, further policy tightening may be required.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. interest rates

  Directly related

  Strengths

  A scenario of moderating inflation supports unchanged rates or future easing.

  Weaknesses

  Inflation remains above the 2% target, and policy easing lacks immediate confirmation.

  Comparison

  Compared with a single-path forecast, the minutes present a stronger dependence on scenarios.

  Risks

  If inflation remains persistently high, the federal funds rate may face further upward pressure.

• U.S. equities

  Indirectly related

  Strengths

  The absence of further rate increases would support risk-asset valuations, while AI-related investment demand continues to support growth.

  Weaknesses

  AI-related demand could also increase inflation persistence, thereby weighing on valuations.

  Comparison

  Consumption by high-income households and rising stock prices create positive feedback, but equities remain sensitive to policy rates.

  Risks

  Persistent inflation could raise expectations for rate hikes and weigh on equity valuations.

• The U.S. dollar and macro risk assets

  Indirectly related

  Strengths

  If policy remains unchanged and inflation declines, macroeconomic volatility could decrease.

  Weaknesses

  The policy outlook still depends on future inflation data and external shocks.

  Comparison

  Unlike a clear signal of rate cuts, this report emphasizes the coexistence of an unchanged baseline and upside inflation risks.

  Risks

  The Middle East conflict, tariffs, and rising energy prices could alter policy expectations.

Key data

• June federal funds target range3.5%-3.75%All FOMC participants supported keeping rates unchanged in June.
• Current year-over-year core PCE inflation3.4%Goldman Sachs expects it to slow to 3.0% by December 2026.
• December 2026 core PCE inflation forecast3.0%Partly reflects the impact of BEA methodological adjustments.
• Current year-over-year core CPI inflation2.9%Goldman Sachs expects monthly core CPI readings to remain moderate over the coming months.
• December 2026 core CPI inflation forecast2.6%Part of Goldman Sachs's baseline path for declining inflation.
• Federal Reserve's long-term inflation target2%The minutes discuss a scenario in which inflation returns to 2% soon.

Impact & implications

The implication for asset pricing is that the U.S. interest-rate path remains driven by inflation data. If core inflation slows as Goldman Sachs forecasts, the narrative of unchanged rates or even future easing will strengthen; if AI investment demand, tariffs, energy prices, or geopolitical factors increase inflation persistence, markets will need to reprice the risk of further tightening.

Risks

• Inflation fails to fall rapidly toward the 2% target.
• AI-related investment demand drives the economy above potential growth and makes inflation pressures more persistent.
• The Middle East conflict, tariffs, supply-chain disruptions, and rising energy prices increase price pressures.
• Inflation in services excluding housing remains elevated.
• A few FOMC participants already believed there were grounds for a rate hike in June, so the risk of future hikes cannot be ruled out.

What to watch

• Whether monthly core CPI readings remain moderate over the coming months.
• Whether year-over-year core PCE inflation declines to 3.0% by December 2026 as Goldman Sachs forecasts.
• Whether references to 'policy firming' become more prominent in subsequent FOMC statements and minutes.
• The dual impact of AI-related investment demand on growth and inflation.
• The effects of tariffs, energy prices, and geopolitical conflict on inflation expectations.
• Whether the labor market remains stable and does not become a source of inflation.