Goldman hints at Fed’s next interest-rate bet under Warsh

 Without forward guidance and a basic tie with the monetary policy forecasts for the rest of the year, the June Federal Open Market Committee meeting left Fed watchers debating whether a rate hike would increase the cost of short-term borrowing costs in 2026.

Goldman Sachs, in a note emailed to TheStreet, said a majority of the policymaking panel could support a rate hike for “a range of different reasons” depending on upcoming inflation prints and if job growth remains solid.

“Our base case is still that the FOMC will leave the policy rate unchanged this year,’’ Goldman said in the June 17 note.

The widely watched CME Group FedWatch Tool currently points to the December FOMC meeting as the most likely venue for the central bank’s first rate hike of the year. Futures traders are penciling in an approximately 60% probability that the 12-member FOMC will hike rates by at least 25 basis points before year-end.

Fed keeps rates steady thus far this year

The FOMC voted 12-0 June 17 to hold the benchmark Federal Funds Rate steady at 3.50% to 3.75%.

Policymakers had cut rates by 25 basis points at its last three meetings of 2025 to shore up the softening labor market. 

These “insurance” cuts stopped after the majority of policymakers decided the risk from higher prices was outweighing signs that the jobs market was stabilizing.

The funds rate is the interest rate at which banks lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the funds rate trigger a chain of events that affect: 

• Other short-term interest rates.
• Foreign-exchange rates.
• Long-term interest rates.
• The amount of money and credit in the economy.
• And ultimately, a range of economic variables, including employment, output, and prices of goods and services.

Fed’s dual mandate requires a tricky dance

The Fed’s dual mandate from Congress requires maximum employment and stable prices.

• Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
• Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.

Historically, the U.S. central bank has favored stable jobs over higher prices.

But not right now.

Fed Chair Kevin Warsh, leading his first FOMC meeting, repeatedly referred to “price stability” during his post-meeting comments, and highlighted how the central bank’s policies have missed its 2% inflation target for the last five years.

He pledged monetary policy would “unambiguously and unanimously” reverse that dip and deliver lower prices. 

“Persistently high prices are a burden for the American people. But the recent past need not be prologue.’’ Warsh said. “I am pleased to report that members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability.” 

Fed drops forward guidance in FOMC statement

Warsh refused to say whether that commitment to lower inflation would lead to an interest-rate hike.

“The good news is we’ll be meeting in six weeks,” Warsh said.  

Related: Fed's Warsh leaves markets guessing on rate hikes

A terse 132-word post-meeting statement  dropped forward guidance language, either verbal or written, to signal markets and the public about the expected future path of interest rates.

Forward guidance states how long the central bank expects interest rates to remain low or high and what economic conditions would trigger a change in monetary policy.

May PCE inflation estimate runs hot

The May Personal Consumption Expenditures, the Fed’s current preferred inflation gauge, is due June 25. 

• Market consensus for the core PCE Index (year-over-year) sits around 3.3%, matching the April reading.
• But the Federal Reserve Bank of Cleveland models project as of June 22 that Headline PCE (year-over-year) will come in at 3.97% up from April’s 3.8%.

Goldman cites geopolitical turmoil with Iran War peace accord

Goldman said “most of the (FOMC) voters still lean toward an unchanged policy rate and that participants treated the news about a deal with Iran and the reopening of the Strait of Hormuz cautiously for now. 

“If so, today’s projections could prove stale if trade resumes, which should resolve the most serious source of upside risk to inflation fairly quickly,’’ the note said. 

Related: Former Fed insiders raise new rate-hike concerns