Goldman Sachs: Fed Expected to Keep Rates Unchanged at June Meeting, Possibility of Rate Hike is Low

Goldman Sachs released a research report indicating that since the last FOMC meeting, the most significant economic data change has been a substantial rebound in employment growth, putting the labor market on a more solid path. This has shifted market focus to whether inflation levels have worsened enough to support an interest rate hike. However, Goldman Sachs believes the likelihood of a rate hike is low.

The bank pointed out that, on one hand, the Federal Reserve has generally not raised interest rates in response to oil price shocks in the past; on the other hand, the current environment has reduced the likelihood of oil price shocks causing self-reinforcing high inflation. That said, some worrying signs have already appeared—if inflation expectations or the breadth of high inflation categories were to rise significantly, the probability of a rate hike would increase.

Goldman Sachs believes that in the first June meeting chaired by the new chair, the FOMC is very likely to keep the federal funds rate unchanged and remove the previous forward guidance that hinted at a rate cut. The bank expects the meeting statement will only remove the phrase "the extent and timing of additional adjustments" regarding federal funds rate policy changes.

The bank projects that the median of the dot plot will reflect a flat federal funds rate through 2026, with three committee members forecasting a rate hike later this year. However, the bank expects the median dot will still indicate two eventual rate cuts, most likely in 2027 and 2028. Some neutral rate dots may tick higher, but the median is unlikely to rise. The bank assumes the new chair, Waller, will not submit a dot plot, since he has previously criticized the use of forward guidance.