Goldman: We expect the FOMC to leave the fed funds rate unchanged at its July meeting this week.

President Logan has expressed support for “modestly higher” interest rates and might dissent in favor of a hike, and one or two other voters might as well.

The post-meeting statement might acknowledge the upside risks to inflation posed by renewed geopolitical conflict as a nod toward the possibility that the FOMC could hike if the situation worsens.

We do not expect Warsh to offer many hints about the policy outlook in his press conference, though he might also acknowledge the upside risks to inflation posed by the latest rise in oil prices. He recently announced the leaders of the five Chairman’s Task Forces for Advancing Monetary Policy and might provide an update on the timeline for their work.

Market pricing implies that investors see the outcome of the July meeting as unusually uncertain. If current pricing implying a roughly 40% chance of a hike persists going into the meeting, either outcome would be the largest surprise in a few decades at a meeting where the Fed hiked or held (Exhibit 2), because the Fed has historically avoided delivering surprise rate hikes at its meetings.

The market uncertainty likely reflects that Chairman Warsh’s approach is sufficiently different to raise doubts about whether historical patterns still apply, that his own position on hiking remains unclear, that the FOMC has been split recently, that some of the re-escalation with Iran occurred during the blackout period, and that further escalation is possible before Wednesday.

While we agree that the uncertainty is greater than usual, most voters appear unlikely to push for a hike next week after the softer June inflation data, and some might be especially reluctant to deliver a surprise hike at a meeting without a Summary of Economic Projections out of fear that the market might infer more than they intended.