Goldman Sachs expects the July FOMC to stay on hold, but inflation tolerance has narrowed further

Overview

This report previews the July FOMC meeting, with the core conclusion that inflation data have improved recently but geopolitical news has worsened. Goldman Sachs expects the Fed to keep the federal funds rate unchanged at the July meeting because June inflation data were soft, the Fed has historically tended to avoid surprise hikes, and this meeting does not include a Summary of Economic Projections, making participants less willing to send an overly strong signal. However, the rebound in oil prices and the ongoing risk of supply shocks have reduced inflation tolerance.

Core views

Goldman Sachs’ base case is that the Fed will stay on hold at the July meeting and keep rates unchanged through year-end. The report argues that the combined impact of tariffs, war, and AI mismeasurement on monthly inflation should fade in coming months, leaving a sufficiently mild core PCE path. But if inflation news stops improving as expected, many FOMC participants may support a rate hike to avoid the public misreading the Fed as accepting high inflation and to guard against the risk of inflation expectations becoming unanchored.

Analysis framework

The report combines analysis of inflation data, energy price shocks, FOMC participant commentary, and market pricing. On inflation, it focuses on comparing core CPI with core PCE and assessing the impact of BEA methodological adjustments on AI-related inflation mismeasurement; on policy, it compares the Fed’s historical aversion to surprise hikes, divisions among participants, uncertainty over Chair Warsh’s stance, and the market-implied probability of hikes.

Methodology notes

• Macro Policy AnalysisFOMC Scenario Analysis

  Base case and risk scenarios

  It uses staying on hold as the base case while adjusting the probability of rate hikes based on inflation and geopolitical shocks.

• Inflation AnalysisCore CPI to Core PCE Mapping

  Monthly core inflation transmission

  The report expects June core CPI at -2bp to correspond to roughly 18bp in core PCE, and on that basis judges that the core inflation trend is softening.

• Market Pricing ComparisonPolicy Expectation Gap Analysis

  Differences between market-implied probabilities and institutional forecasts

  The report notes that market pricing suggests unusually high uncertainty around the July meeting outcome, while Goldman Sachs’ base-case and probability-weighted forecasts remain relatively more dovish than the market.

Asset mapping & comparison

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

• U.S. Federal Funds Rate

  Directly related

  Strengths

  The base case supports no change in July and through the rest of the year.

  Weaknesses

  If inflation data deteriorate, participants may shift toward supporting a rate hike.

  Comparison

  Goldman Sachs’ policy path is more dovish than market pricing.

  Risks

  A rebound in oil prices, prolonged supply shocks, and concerns about inflation expectations could raise the probability of hikes.

• U.S. Treasury Yields

  Indirectly affected by policy expectations and inflation risks

  Strengths

  If inflation continues to soften, upward pressure on yields may ease.

  Weaknesses

  The market is already pricing in high meeting uncertainty, so short-term volatility may be elevated.

  Comparison

  The report argues that market pricing for hikes is relatively more hawkish than Goldman Sachs’ forecast.

  Risks

  A hawkish FOMC statement, dissents from participants, or escalating energy shocks could push yields higher.

• Crude Oil and Energy Prices

  Source of upside inflation risk

  Strengths

  Energy prices are a key variable explaining the renewed rise in policy risk.

  Weaknesses

  There is uncertainty around the degree to which oil prices feed through to core inflation.

  Comparison

  The report believes the impact of the conflict on the policy debate may exceed what simple oil-price pass-through math would suggest.

  Risks

  Further escalation in the Iran situation or additional attacks on Russian refineries could prolong the supply shock.

Key data

• June Core CPI-2bpGoldman Sachs expects this reading to correspond to roughly 18bp in core PCE.
• June Core PCE Forecast18bpViewed as the starting point of a milder core inflation trend.
• July Core PCE Forecast21bpStill expected to be sufficient to support the Fed staying on hold through the rest of the year.
• August Core PCE Forecast23bpTogether with the July and June forecasts, it forms a relatively mild short-term core inflation path.
• Impact of BEA Methodological Adjustment-0.2 percentage pointsExpected to lower year-over-year inflation in the August report, partly correcting AI-related mismeasurement.
• Market-Implied Probability of a July Rate Hikeabout 40%The report says that if this pricing persists into the meeting, either a hike or staying on hold would constitute one of the largest surprises in decades.
• Goldman Sachs Rate Hike Probability Forecast35%Raised from 25% to 35%, but still below the degree of tightening implied by market pricing.

Impact & implications

For asset pricing, the report’s message is that the near-term policy base case remains dovish, but inflation and geopolitical risks make upside tail risk to rates more prominent. If inflation continues to improve, the rates market may reprice toward staying on hold; if oil prices and supply shocks persist, internal FOMC support for hikes may strengthen, and longer-end yields and risk assets will face greater volatility.

Risks

• Inflation data fail to continue improving, prompting more FOMC participants to support a rate hike.
• Renewed escalation in the Iran war or intensified attacks on Russian refineries further push up energy prices.
• Repeated supply shocks make both the market and the Fed more concerned about inflation persistence.
• The public misreads the Fed as accepting high inflation, or inflation expectations risk becoming unanchored.
• Uncertainty over Chair Warsh’s stance and wider internal FOMC divisions increase uncertainty over the meeting outcome.

What to watch

• Whether the July FOMC keeps rates unchanged and whether there are dissenting votes in favor of a hike.
• Whether the post-meeting statement explicitly acknowledges upside inflation risks from geopolitical conflict.
• How Warsh describes oil prices, inflation risks, and the monetary policy outlook in the press conference.
• Whether subsequent core PCE readings track close to the forecast path of 18bp, 21bp, and 23bp.
• Whether the Iran situation, attacks on Russian refineries, and oil-price moves continue to increase the risk of supply shocks.
• Whether the BEA methodological adjustment in the August inflation report released in September lowers year-over-year inflation by about 0.2 percentage points as expected.