The Hormuz blockade has entered its seventh week. Goldman Sachs: This is not a repeat of the 2022 inflation; there is still room for two rate cuts within the year.

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The US-Iran conflict continues to escalate. Goldman Sachs believes that this round of energy price shock will not repeat the nightmare of soaring inflation in 2022 and maintains its forecast of two rate cuts within the year.

Negotiations between the US and Iran failed to reach a peace agreement in Islamabad last weekend. According to reports, a US-led blockade operation involving 15 warships began in the Strait of Hormuz early Monday. Against this backdrop, Goldman Sachs analyst Jessica Rindels provided clients with a set of economic analysis frameworks to deal with the current fog of war and energy turmoil. The core judgment: This conflict will bring a mild stagflation shock, but its intensity is far less than that of the Russia-Ukraine war.

The direct implication of Rindels’s framework for the market is: Inflation will heat up somewhat, economic growth will slow, and unemployment will rise slightly, but the degree of impact is not enough to trigger a full-blown supply chain crisis, nor will it force Fed Chair Powell to take panic-driven rate hikes. Based on this, Goldman Sachs raised its inflation forecast, lowered its GDP forecast, and slightly raised its unemployment rate forecast.

Oil price shock mechanism: Erodes purchasing power, but does not trigger a capital expenditure boom

Rindels' analytical framework first clarifies the transmission path of oil price increases. Higher oil prices will erode household purchasing power, push up overall inflation, and squeeze consumer spending—this is the core logic behind Goldman’s raising inflation forecasts and lowering GDP forecasts.

It is worth noting that Rindels made it clear that she does not expect rising energy prices to trigger a capital expenditure boom in the US shale oil sector. She believes oil and gas producers remain overly cautious and will not actively expand production capacity in response to what is only expected to be a short-lived period of high oil prices. This means that the impact of this round of energy shock on the economy will be reflected more in downward pressure on the consumption side, rather than upward support from the industrial side—the economy gets less buffer, and bears more drag.

Rate cut path: 25 basis points each in September and December

Under the above macro framework, Goldman maintains its forecast of two rate cuts within the year. Rindels stated that the rise in unemployment and the further modest decline in core inflation—where the effect of tariffs fades from the year-on-year calculation, expected to offset the upward pressure transmitted from energy prices—will jointly provide strong grounds for the Fed to cut rates by 25 basis points in both September and December.

However, Rindels also admitted there is uncertainty. She stated that if some FOMC members believe inflation remains too high and oppose rate cuts at that time, she would not be surprised, and the committee’s final decision is hard to determine—especially considering factors such as changes in Fed leadership and the possible departure of Powell.

Key differences compared to 2022: Impact intensity is different

A core judgment in Goldman’s current framework is to distinguish the current situation from the inflation shock caused by Russia-Ukraine conflict in 2022. Rindels believes that although the US-Iran conflict has now entered its seventh week, its degree of disturbance to the global supply chain is not on the same level as the Russia-Ukraine war, and thus it does not have the conditions to trigger a similar full-scale inflation surge as in 2022.

In Goldman’s view, the nature of this shock is more akin to "mild stagflation" rather than "uncontrolled inflation," which is also why they are maintaining the forecast for rate cuts instead of switching to rate hike expectations. Meanwhile, another Goldman analyst, Shreeti Kapa, also pointed out in a separate report that the stock market's "final showdown" is approaching, demonstrating high internal consensus at Goldman regarding the critical juncture in the current market.

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