Now They’ll Be More Dovish: Goldman Tweaks Fed Outlook After CPI Miss

And now cue everyone scrambling to adjust their expectations for the Fed.

Last night, we brought you Goldman’s full FOMC preview, but at the last minute, they’re making a few changes to account for this morning’s dismal data.

Here’s the latest iteration…

Via Goldman

Core CPI inflation was lower than expected for the third consecutive month, and the year-over-year rate fell two tenths to +1.7%. Retail sales were mixed, with core growth in May below consensus expectations but large positive revisions to prior months. We now expect the FOMC statement to include a stronger acknowledgement of the recent soft inflation data, and our expectations for the Summary of Economic Projections have become incrementally more dovish.

Given further evidence of a more persistent core inflation shortfall, we now expect this afternoon’s FOMC statement to include a stronger acknowledgement of the recent soft inflation data. Specifically, we expect the committee to drop the word “somewhat” from the inflation characterization (from ” inflation continued to run somewhat below 2 percent”).

As shown in Exhibit 1, we also now expect the Summary of Economic Projections to continue to show a median of 3 rate hikes in 2018 (vs. our previous expectation of an increase to 3.5 hikes), as the hawkish impact of governor Tarullo’s retirement is now expected to be offset by a shift of one of “4-hikers” to three hikes in 2018. We also now expect the 2017 Core PCE projection to decline by two tenths to +1.7% (vs. our previous expectation of a one tenth downgrade). These developments also increase our conviction that the committee will lower its long-term unemployment rate projection (to 4.6%).



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