US Economics Analyst July FOMC Preview Better Inflation Data, Worse Geopolitical News

Economics Research 26 July 2026 | 5:20PM EDT

July FOMC Preview: Better Inflation Data, Worse Geopolitical News

n The inflation data have improved but the geopolitical news has worsened in David Mericle | recent weeks. We expect the -2bp core CPI print for June to translate to 18bp on Goldman Sachs & Co. LLC core PCE and mark the start of a softer trend. We also expect the BEA’s recently announced methodological changes designed in part to fix the mismeasurement of AI effects to shave 0.2pp off of year-over-year inflation. But the re-escalation of the war with Iran and attacks on Russian oil refineries have pushed energy prices higher and revived fears that the already lengthy series of supply shocks could continue. n We expect the FOMC to leave the fed funds rate unchanged at its July meeting next week. The statement might acknowledge the upside risks to inflation posed by renewed geopolitical conflict, and there will likely be at least one dissent in favor of a hike. n Market pricing implies that investors see the outcome of the July meeting as unusually uncertain, likely because the FOMC has been split recently, Chairman Warsh’s own position remains unclear, and some of the re-escalation with Iran occurred during the blackout period. But most voters appear unlikely to push for a hike next week after the softer June inflation data, the Fed has historically avoided delivering surprise rate hikes, and we suspect that voters might be especially reluctant to do so at a meeting without a Summary of Economic Projections. n Despite the rebound in oil prices, we continue to think that the combined impact of tariffs, the war, and AI effects on monthly inflation should diminish in the months ahead, leaving core inflation soft enough for the FOMC to stay on hold through the end of the year. n But comments from FOMC participants indicate that many could support hiking if the inflation news is worse than we expect. As a result, as we noted when the re-escalation with Iran began, we see little margin for error on inflation and suspect that continued conflict could influence the rate hike debate more than the oil passthrough math alone implies by adding to concerns that supply shocks could continue and can come back unpredictably even after they appear over. n We are skeptical that modest rate hikes would provide much of a disinflationary offset to the impact of supply shocks. We suspect Fed officials would agree, but if the inflation news does not continue to improve as we expect, some might still

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Goldman Sachs US Economics Analyst

see it as important for the Fed to respond to avoid the public misperception that it accepts high inflation. Many FOMC participants have also expressed concern that prolonged high inflation could unanchor inflation expectations, and while we do not think this has happened yet, some might feel that it can be difficult to know in real time and that it is better to err on the side of acting early. n For these reasons, while our baseline forecast remains that the Fed will remain on hold through year-end, we have raised our probability of eventual rate hikes from 25% to 35%. Even after the change, our probability-weighted Fed forecast remains dovish relative to market pricing.