Goldman Sachs says a September Fed rate hike looks very unlikely as inflation cools

Goldman Sachs Chief Economist Jan Hatzius said a September increase in the Federal Reserve’s policy rate is “very unlikely,” citing signs that inflation is losing momentum and that parts of the economy are cooling.

In a Sunday client note highlighted by Yahoo Finance, Hatzius pointed to softer retail sales, weak employment data, and slowing inflation as the main reasons a new hike may not be necessary. The argument is essentially that the Fed can look through earlier persistence in prices because the forward-looking inflation picture is deteriorating.

The note adds to the broader debate on how close the Fed is to being done tightening. A September hike would suggest policymakers still believe inflation risks remain high enough to require additional restraint. Goldman Sachs’ view, as described in the report, pushes in the opposite direction, emphasizing cooling indicates rather than renewed price pressure.

Retail sales trends can act as a proxy for household demand, and a slowdown there can mean fewer upward pressures on prices through consumption. Employment data, in turn, can shape the Fed’s view of labor-market tightness and wage-related inflation risks. Goldman’s framing suggests it sees less of both, which would reduce the need for further rate increases.

For markets, the implication is that investors may be less likely to price in an additional hike as strongly, particularly if incoming data continue to align with the pattern Goldman Sachs is citing. Even so, the bank’s conclusion is best read as conditional on the continued behavior of inflation and economic indicators rather than a guarantee that the Fed will hold steady at every meeting.

Goldman’s position also reflects how the Fed’s rate decisions have evolved as policymakers balance two competing considerations: inflation progress versus economic growth and employment. When inflation slows and labor-market data weaken, the risk of overshooting can become more prominent, which is consistent with Goldman Sachs’ argument that September is not the moment for another hike.

What Goldman did not disclose in the cited report is as important as what it did. The summary does not provide the specific inflation gauges Hatzius is relying on, the magnitude of the data slowdown, or how Goldman Sachs expects the Fed to describe its reaction function. It also does not spell out whether Goldman expects rates to be held, cut, or remain elevated after September.