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…
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%).