Goldman Sachs: June FOMC Expected to Hold Rates Steady, Low Probability of Rate Hike

Overview

This Goldman Sachs macro research report focuses on the preview of the June 2026 FOMC meeting, with the core backdrop being Kevin Warsh chairing the meeting for the first time as Federal Reserve Chair. The report analyzes the most important change in recent economic data—a significant improvement in employment growth, putting the labor market on a more robust trajectory—and the resulting shift in policy focus: from concerns about economic weakness to assessing whether inflation is worrying enough to warrant a rate hike. Goldman Sachs's core judgment is that despite war and rising oil prices pushing up inflation in 2026, the Fed will most likely keep rates unchanged, drop the previous forward guidance hinting at rate cuts, and shift to a more neutral, balanced guidance.

Core views

The significant improvement in employment data is the most critical change recently. Goldman Sachs notes that since the last FOMC meeting, job growth has been impressive, putting the labor market on a more solid track. Although GDP growth in the second half of the year may be slightly below potential due to high oil prices, the unemployment rate is expected to rise only modestly to 4.4%. On inflation, war and rising oil prices will push headline PCE inflation above 4% in 2026 and keep core PCE inflation above 3% for the full year. However, Goldman Sachs believes the current inflation impact is more like a typical large oil shock pass-through, rather than the widespread shortages and price spikes seen during the pandemic. With the effects of last year's tariff increases gradually rolling off year-over-year calculations, and the most extreme effects of oil prices and AI-driven computer memory price shocks having passed, the monthly pace of inflation is expected to moderate for the remainder of the year. On monetary policy, Goldman Sachs maintains its judgment that a rate hike is unlikely, based on two points: first, the Fed historically does not typically hike rates in response to oil shocks (unlike other central banks such as the ECB, which react differently); second, the current labor market is more balanced and wage growth starts from a moderate level, reducing the possibility of oil shocks triggering self-sustaining high inflation. However, if inflation expectations or the breadth of high inflation show meaningful increases, the probability of a rate hike would rise. For the specific decisions of the June meeting, Goldman Sachs expects the FOMC to keep the federal funds rate unchanged at 3.50%-3.75% and, by removing the phrase 'the extent and timing of additional adjustments,' abandon the previous forward guidance hinting at rate cuts and shift to balanced guidance. The statement may also be further simplified and mention the improvement in job growth. Regarding the dot plot, the median dot for 2026 is expected to show no change in the rate, with about three participants predicting a rate hike later this year and one possibly showing a rate cut. The median dot still implies two final rate cuts, most likely one each in 2027 and 2028. Several participants' dots for the neutral rate may rise, but the median is unlikely to increase. Warsh, due to his past criticism of forward guidance, may not submit a dot. For the Summary of Economic Projections (SEP), 2026 GDP growth is expected to be revised down by 0.2 percentage points to 2.2% (Q4/Q4), the unemployment rate revised down by 0.1 percentage points to 4.3%, headline PCE inflation revised up significantly by 1.2 percentage points to 3.9%, and core PCE inflation revised up by 0.6 percentage points to 3.3%. The 2027 inflation forecast is expected to be revised up by only 0.1 percentage points to 2.3%, suggesting the impact of the war on inflation largely fades after 2026. On the timing of rate cuts, because core PCE inflation will take a considerable time to approach 2%, Goldman Sachs schedules the final two rate cuts for June 2027 and December 2027. However, it also acknowledges that a prolonged pause increases the probability the FOMC may consider current rates appropriate, making a flat path a reasonable alternative to the baseline scenario. Probability-weighted Fed projections remain more dovish than market pricing, mainly reflecting skepticism about a rate hike.

Analysis framework

Goldman Sachs's analysis unfolds along the main line of 'data changes → inflation assessment → policy reaction → forward guidance adjustment → leadership impact.' First, it identifies the improvement in employment data as the most prominent economic change, then distinguishes it from the inflationary effects of the oil shock—the key being whether this is a 'one-off pass-through' or 'self-sustaining inflation,' with the core basis being the degree of labor market balance and the starting point of wage growth. In judging interest rate policy, Goldman Sachs uses a historical comparison method (the different reactions of the Fed vs. the ECB to oil shocks) and a conditional probability method (assessing the likelihood of oil shocks triggering persistent inflation under current economic conditions). For FOMC meeting decisions, the analysis focuses on how subtle changes in statement wording reflect shifts in policy stance, and how changes in the dot plot distribution reveal internal committee divergence. Finally, it incorporates the personal policy preferences of the new Chair Warsh (based on his past public criticisms) into the analytical framework, assessing the policy priorities he may demonstrate at his first meeting.

Methodology notes

• Macroeconomic frameworkTaylor rule

  Central bank interest rate decision rule: adjust policy rate based on output gap and inflation gap

  Goldman Sachs implicitly uses a framework similar to the Taylor Rule in its analysis, assessing whether and when current economic conditions (employment, inflation) require interest rate adjustments. The report notes that when the FOMC judges whether a rate hike is needed, the core focus is on whether inflation is 'worrisome enough to support a rate hike,' which is an assessment of the policy reaction function.

• Cycle and Business Climate Framework

  Oil shock inflation pass-through analysis: distinguishing between one-time price shocks and self-sustaining inflation

  Goldman Sachs makes a key distinction between the current oil shock and pandemic inflation: the former is a 'typical pass-through of a large oil shock' (transitory), while the latter was 'widespread shortages and price spikes' (persistent). The judgment criteria are whether the labor market is balanced, wage growth is moderate, and inflation expectations are anchored. This distinction is the core basis for central banks in determining their policy response.

• Quantitative/Factor/Portfolio Theory

  Dot Plot analysis: interpreting the distribution of individual FOMC participant projections

  Goldman Sachs provides a detailed analysis of changes in the distribution of individual dots in the dot plot, including the movement of the median dot, the number of participants predicting rate hikes/cuts, and changes in neutral rate dots. This analytical method is used to infer the degree of policy divergence within the committee and the probabilities of potential policy paths.

Key data

• 2026 GDP Growth Forecast (Q4/Q4)2.2%Down 0.2 percentage points from the March SEP
• 2026 Unemployment Rate Forecast (Q4 Average)4.3%Down 0.1 percentage points from the March SEP
• 2026 Headline PCE Inflation Forecast (Q4/Q4)3.9%Up significantly by 1.2 percentage points from the March SEP
• 2026 Core PCE Inflation Forecast (Q4/Q4)3.3%Up by 0.6 percentage points from the March SEP
• 2027 Core PCE Inflation Forecast2.3%Up only 0.1 percentage points from the March SEP, suggesting limited war impact
• Current Federal Funds Rate Target Range3.50%-3.75%Expected to be held unchanged at the June meeting
• Goldman Sachs Baseline Forecast for Final Two Rate Cuts TimingJune 2027, December 2027Because core PCE inflation will take considerable time to approach 2%
• Number of FOMC Participants Forecasting a Rate Hike in 2026About 3But the median dot shows rates unchanged in 2026

Impact & implications

Goldman Sachs believes the core significance of the June FOMC meeting lies in the shift in policy stance: from hinting at rate cuts to balanced guidance, reflecting the improvement in economic data (especially employment) and rising inflationary pressures. For the market, this means rates will remain unchanged in the near term, but expectations about the timing of future rate cuts may need adjustment. The report cautions that if inflation expectations or the breadth of high inflation show meaningful increases, the probability of a rate hike would rise. Conversely, if the economy continues to perform well, the FOMC may consider current rates already appropriate, thus extending the pause or even ceasing rate cuts entirely. Goldman Sachs's probability-weighted projections are more dovish than market pricing, mainly reflecting its skepticism about a rate hike, but this also implies potential volatility if the market reprices rate hike risks.

Risks

• Longer war duration, higher oil prices, greater trade disruptions, and more severe supply shortages could trigger pandemic-like inflation contagion
• Meaningful rise in inflation expectations
• High inflation spreads to more categories (increase in inflation breadth)
• After a prolonged pause, the FOMC may consider current rates appropriate, leading to no further rate cuts

What to watch

• Deletion of the phrase 'the extent and timing of additional adjustments' in the June FOMC statement
• Distribution of rate forecasts in the dot plot for 2026-2028, especially the number of participants forecasting a rate hike
• Upward revision magnitude of the 2027 inflation forecast in the Summary of Economic Projections
• Warsh's policy priority statements at the press conference, especially on communication policy, balance sheet policy, and financial regulation
• Changes in inflation expectation indicators
• Changes in the breadth of price increases across categories within core PCE inflation