Goldman Sachs: June Inflation Data Rules Out Fed July Rate Hike; Waller Must Clarify Reaction Function
Alina Collins
Goldman says June inflation data have shut the door on a July Fed rate hike, but Chair Waller faces a deeper test — explaining the policy logic clearly enough to keep financial conditions from overshooting.
What did the June inflation data actually show?
Goldman estimates June core PCE — the price index excluding food and energy — rose just 0.18% month-on-month, with the year-on-year rate at 3.3%. Core CPI came in even lower at 2.6% year-on-year.
A cleaner gauge, trimmed-mean PCE — which strips out the most extreme movers before averaging — printed 0.14% month-on-month and 2.3% year-on-year.
This means → multiple inflation measures cooled at once. That is not a one-off quirk but a signal of genuine disinflation. Chief economist Jan Hatzius concluded the July hike window is now "effectively eliminated."
July is off — but could a hike still come later?
Goldman has not ruled out a hike at subsequent meetings, but the bar is high: inflation must come in well above expectations and unemployment well below — both conditions at once.
The firm's scenario probabilities: base case (35%) — two 25 bp cuts in June and December 2027; hike scenario (25%); high-inflation / high-growth / high-terminal-rate (25%); recession (15%).
In plain terms = Goldman's most likely outcome is a slow easing cycle next year, but the door to hikes is not welded shut — there is still a one-in-four chance. The probability-weighted rate path sits below current market pricing, meaning the market has over-bet on tightening.
Why must Waller "talk more"?
Goldman's core call: Fed Chair Waller will have "no choice" but to explain the committee's economic outlook and reaction function — what data would trigger what policy moves — more explicitly than his predecessors.
This reflects an institutional gap. The FOMC no longer publishes a dot plot and may act at non-scheduled meetings, leaving the market with no anchor for expectations. If Waller does not fill the information vacuum, financial conditions risk overshooting — tightening or loosening beyond what the data warrant.
This means → Waller has spent his first two months stressing that "lowering inflation is job one." But rhetoric alone is not enough. Goldman argues he must now lay out the policy logic openly, or the market's own guesses will drift even further from reality.
Is the labor market cooling?
June nonfarm payrolls came in below expectations. Goldman cut its estimate of the underlying job-growth trend from 130,000 to 73,000 per month — nearly halved.
Unemployment fell to 4.2%, but Goldman attributes the drop largely to an unusually sharp decline in labor-force participation, which it expects to reverse in coming months. The headline improvement "should not be over-read."
On wages, Goldman's pay tracker has slowed to 3.4%, below the 4% level consistent with 2% inflation assuming a 2% productivity trend. This means → wage growth is no longer feeding inflationary pressure.
What happens to consumption in the second half?
Goldman estimates the U.S. economy expanded at roughly 2.25% trend growth in the first half, with tax cuts offsetting the drag from high oil prices.
The second-half outlook is softer. Slowing real disposable cash-flow growth is expected to weigh on spending; if oil stays elevated after the collapse of the U.S.–Iran ceasefire, the drag deepens.
An AI-boom cooldown would also put the roughly 0.5 percentage-point consumption boost from stock-market wealth effects at risk. In plain terms = tax cuts and AI euphoria propped up spending in the first half — both props could loosen in the second.
Where does U.S. inflation stand globally?
Goldman flags U.S. core PCE as a clear outlier among G10 economies — core inflation in every other G10 member has already fallen to 2.1%.
A technical tailwind is coming: a September revision to software and accessories price methodology is expected to shave roughly 0.2 percentage points off year-on-year core PCE.
Goldman forecasts core PCE inflation will gradually fall toward 2% through 2027. This means → whether subsequent data keep confirming disinflation will be the key checkpoint for the market to reprice.
Content is for reference only, not financial advice.