Federal Reserve rate cuts won’t arrive until 2027, Goldman Sachs Research now forecasts, as new Chairman Kevin Warsh prepares to hold the policy line through year-end despite a softer-than-expected June inflation print. The call places the central bank in a wait-and-see posture while geopolitical shocks and measurement quirks keep price pressures stubbornly above target.
David Mericle, Goldman’s chief US economist, expects the Fed to leave its policy rate unchanged at next week’s meeting and through the remainder of 2026, with the first cut coming next year. The forecast hinges on core PCE inflation staying near its current level — roughly 20 basis points above where the Fed would like it — rather than accelerating further.
Why Inflation Stays Sideways
The June CPI report came in weaker than expected, but Mericle cautions against reading too much into a single month. Gasoline prices fell in June and are now climbing again, suggesting part of the softness was mechanical. Still, Goldman sees the print as the start of a run of cooler monthly data, driven by three forces fading in sequence.
First, the tariff effects that pushed prices higher last year have largely dropped out of the year-on-year calculation and look negligible on a forward basis. Second, oil prices — though re-escalating with renewed Middle East tensions — remain well below their late April and May peaks, meaning the largest sequential impact on prices likely landed in the second quarter. Third, the mismeasured effects of AI demand in the PCE index, which Mericle says have been amplified by statistical quirks, should soften sequentially in coming months.
Stripping out tariffs, the war, and the AI measurement effects, core inflation has actually been running reasonably close to the Fed’s 2% target for some time. Mericle estimates those three factors together are worth roughly a percentage point on PCE. Without them, the inflation picture would look far less troubling.
Warsh’s Fed Runs Out of Patience
The new chairman’s cautious tone in congressional testimony last week, paired with hawkish-leaning commentary from other committee members, signals a shift in how the Fed is thinking about supply shocks. Past central bank orthodoxy held that policymakers should “look through” one-time price level increases — whether from tariffs, oil spikes, or index quirks. Under Warsh, that patience is wearing thin.
The message from recent FOMC minutes, Mericle notes, is that the Fed has finished litigating the causes of inflation. Whatever the source, committee members increasingly feel that elevated price growth has persisted too long and risks becoming self-fulfilling. Even if the current episode is a long string of one-off supply shocks, the danger is that households and businesses grow accustomed to 3% inflation and embed it into wage and pricing decisions.
That stance leaves the inflation forecast with little margin for error. Goldman’s call for a 2027 cut presumes core PCE holds near its current pace. A renewed surge — most likely from a further Middle East escalation lifting oil — could force the Fed’s hand in the other direction.
Labor Market and Growth Hold Up
The most positive surprise of the year, Mericle says, has been the labor market’s resilience. After months of nearly flat job creation, hiring has picked up sharply over the past four months — puzzlingly, in the aftermath of a war breaking out and oil prices spiking. The concern about labor market deterioration that Goldman carried into the year has, for now, come off the table.
Growth is tracking at roughly 2% for 2026, consistent with Goldman’s outlook. The economy itself, Mericle emphasizes, is not generating the inflation problem. The pressure comes from external and statistical factors layered on top of an otherwise stable expansion.
What Happens Next
Investors should watch three things in the coming months. The July FOMC meeting will confirm the hold, but the statement and Warsh’s press conference will reveal how forcefully the new chairman pushes the no-more-patience message. Second, oil prices remain the single biggest wildcard — any further Middle East escalation that lifts crude back toward spring peaks would pressure both inflation and the Fed’s tolerance. Third, the monthly run of inflation data through the fall will test whether June’s softness was the start of a trend or an outlier. Goldman’s 2027 rate cut call depends on core PCE staying close to current levels; a sustained break higher would force a rethink.
— Maya Chen, business desk, AXO News