Goldman Sachs Exchanges
2026-07-27 · Hosted by Allison Nathan · Goldman Sachs
Executive Summary
Goldman Sachs chief U.S. economist David Mericle told host Allison Nathan that the biggest surprise of 2026 has been a resurgence in job growth even as the Iran war pushed oil prices higher, while the biggest disappointment has been inflation drifting toward 3% instead of the 2% Goldman expected once tariff effects faded. He called the recent soft June CPI print the start of a run of better inflation data, but cautioned it likely overstates the improvement, with the war remaining the "biggest wild card" for prices.
Key Stories & Changes
1. Inflation Path and the Fed's July Meeting
June CPI came in weaker than expected; Mericle called it "a bit of an outlier" but the start of softer inflation data over the prior six months
Three inflation drivers seen fading sequentially: tariff effects (now "pretty negligible"), the Iran war's oil-price impact (biggest hit likely already in Q2), and mismeasured AI demand effects in the PCE index
Net of tariffs, war, and AI-related mismeasurement, core CPI is "reasonably close to 2%"
Goldman expects the Fed to hold rates at the July meeting, with core PCE inflation running near 20 basis points monthly or a touch higher through year-end
2. Fed Rate Path and Market Mispricing
Goldman's base case: Fed on hold in 2026, first cut not until 2027
Market pricing implies roughly a "hike and a half" — Mericle frames this as close to a 50/50 chance of two-to-three hikes
Goldman's own probability of hikes: ~25%, versus what market pricing implies (~50%)
The war in Iran remains the key upside risk to the inflation outlook and, by extension, to Fed policy
3. New Fed Chairman Kevin Worsh's Policy Changes
Worsh has commissioned a task force reviewing the Fed's balance sheet size and asset composition
Mericle sees little appetite within the Fed to shrink the balance sheet's overall size (tied to the "ample reserves" framework)
Communication policy is in flux: Worsh has long opposed forward guidance; the FOMC has already dropped the soft guidance language suggesting cuts were more likely than hikes
One plausible change: adopting former Vice Chair Don Kohn's proposal to stop publishing SEP medians — a "relatively minor" shift Mericle doesn't expect to matter much to investors
Fully scrapping the Summary of Economic Projections would be a bigger step away from transparency that Mericle would find surprising
4. Resilient Labor Market Despite Oil Shock
Job growth has picked up sharply over the last four months, defying the historical pattern where rising oil prices curb discretionary-sector hiring
The economy is now running above the "break-even rate" of jobs needed to hold unemployment steady — estimated at just 50,000–60,000 jobs/month given reduced immigration
Mericle sees this as a sign of underlying growth resilience, not just noise
5. Growth Outlook: ~2% GDP
Goldman's growth forecast: around 2%, "a hair below potential," down from a prior above-potential call near 2.5%
Drag: weaker consumption in H2 as mediocre real income growth, low savings rates, and expired tax-refund boosts meet higher gasoline prices; also weakness in housing and government spending
Offset: outsized strength in business investment
The stock market's rally is adding an estimated 0.3–0.4 percentage points to consumer spending via the wealth effect, similar to last year's contribution
Trends Identified
1. Inflation Is a Series of One-Time Shocks, Not Overheating
Mericle's framework treats current above-target inflation as the sum of tariffs, an oil-price shock from the Iran war, and AI-driven mismeasurement — not a sign the economy itself is overheating. This matters because it shapes the Fed's reaction function: Goldman argues the central bank should be willing to "look through" these shocks rather than hike, but acknowledges patience is wearing thin after a long run of above-target prints.
2. A More Opaque, Less Predictable Fed
The shift away from forward guidance under Chairman Worsh — including dropping SEP medians potentially — is creating a policy environment where markets have "not a lot of margin for error" in interpreting Fed intentions. Mericle flagged that this lack of guidance already contributed to volatility at Worsh's first (June) meeting, raising the risk of larger market moves around future policy shifts, especially a rate hike delivered without context.
3. The Iran War as the Dominant Swing Factor
Nearly every theme in this conversation — inflation, Fed policy, growth — traces back to the war in Iran and its effect on oil prices. Mericle repeatedly called it the "biggest wild card" and the primary risk he's focused on, tying together the inflation outlook, the probability of Fed hikes, and the drag on consumer spending in the back half of the year. ---
Sentiment Analysis
Overall Market Sentiment: Cautiously Reassuring
Mericle's tone was measured and analytical, projecting confidence that inflation will soften and the Fed will hold, while repeatedly flagging the war as the wildcard that could upend that view.
Risk Factors Highlighted
Iran war escalation: Named as the single biggest risk, with potential to keep oil prices elevated and reignite inflation.
Fed hike risk repricing markets: A hike delivered without forward guidance could cause outsized market moves, as seen partially at the June meeting.
Inflation staying "sticky" near 3%: If oil prices don't retreat, sequential inflation may not soften as much as Goldman expects.
Consumer spending slowdown: Weak real income growth, a low savings rate, and expired tax refunds could combine with high gas prices to soften H2 consumption.
Housing and government spending weakness: Both flagged as drags on GDP growth alongside softer consumption.
Reduced Fed transparency: Potential elimination of SEP medians or other guidance could increase policy unpredictability and market volatility.
AI-driven price mismeasurement: Continues to distort PCE inflation readings, complicating the Fed's read on true price pressure.
This episode was covered in today's [The Market Signal — 2026-07-27](https://marketsignal.beehiiv.com/p/the-market-signal-2026-07-27), a cross-source synthesis of multiple podcast reports.