Is the 60% rate hike expectation merely self-indulgent? Goldman Sachs pours cold water on this: the Federal Reserve's fundamental stance remains one of inaction.

Goldman Sachs noted that it bets Kevin Warsh's hawkish rhetoric will not be corroborated by hawkish data, thus maintaining its basic forecast that the Federal Reserve will remain on hold. Jan Hatzius, Goldman Sachs' chief economist, stated that Warsh's speech at Jackson Hole was his most hawkish appearance since taking office as Fed Chairman, but he believes that a mere shift in tone is unlikely to trigger a rate hike next month. In a report to clients, Hatzius indicated that Warsh clearly expressed his primary concern is to ensure that core inflation moves down to the Fed's 2% target at a marked and sufficiently swift pace, warning that there is more work to be done if these conditions are not met. According to Hatzius, Warsh also directly addressed a recent series of encouraging inflation data, acknowledging that the PCE and CPI data this summer outperformed expectations, while arguing that this data has yet to indicate a substantial improvement in core price trends. Hatzius wrote that this statement opened the door for a rate hike in September, but this would only happen if the upcoming August CPI and PPI reports show a stronger-than-expected increase. Goldman's own forecasts suggest this threshold will not be breached. Hatzius indicated that the firm continues to expect the August core CPI and core PCE inflation rates to hover around 0.2%, which they believe is insufficient to support the kind of policy response Warsh's rhetoric implies. On this basis, Goldmans basic forecast remains that the Federal Open Market Committee (FOMC) will keep rates unchanged at the September meeting. If Hatzius' prediction of about 0.2% growth in August core CPI and PCE is correct, it would generally align with recent trend inflation rather than the kind of acceleration Warsh is signaling is needed, which may disappoint traders who pushed the odds of a rate hike to nearly 60% based solely on that speech. This report comes as the market reassesses the probability of September action following Warsh's speech, with interest rate futures indicating a significant increase in implied odds of a rate hike after his Jackson Hole remarks. Goldmans analysis suggests that unless inflation data itself significantly strengthens over the coming weeks, this repricing may prove premature, making the release of August CPI and PPI data a more decisive factor for the September decision than Warshs statements alone.