Institutional Insights - Goldman Sachs FOMC Preview

According to Goldman Sachs 'Encouraging inflation news and a further rise in the unemployment rate have pushed Fed officials closer to cutting. The FOMC is set to hold steady today but is likely to revise its statement to hint that a cut at the following meeting in September has become more likely.

Specifically, we expect the FOMC to revise its statement to say that the unemployment rate has “risen slightly but remains low,” that there has been “further progress” (dropping “modest”) toward the 2% inflation goal, that the risks to the two sides of the mandate “are in” (not “have moved toward”) better balance, and—most importantly—that it now needs only “somewhat” greater confidence in the inflation outlook in order to start lowering interest rates.

We suspect that an acceptable July CPI report would likely be enough to clinch a September cut. Whether the FOMC deviates from the broader plan implied by the June dot plot to normalize the funds rate at a gradual pace of 25bp per quarter as inflation returns to target will likely depend mainly on the labor market, which has sent mixed signals lately, and on fiscal policy after the election. We now see the risks to the Fed path as tilted slightly to the downside of our baseline of quarterly cuts, though not quite as much as market pricing implies