Goldman Sachs Says September Fed Rate Hike Very Unlikely

A September interest rate increase by the Federal Reserve is "very unlikely" following two months of softer-than-expected jobs and inflation data, according to Goldman Sachs chief economist Jan Hatzius [1]. The assessment suggests that market pricing for the federal funds rate remains too hawkish, as traders adjust their outlook for the central bank’s September 15-16 meeting [2].

Data trends and market positioning

The shift in outlook follows a string of underwhelming economic releases, including sluggish retail sales, declining nonfarm payrolls, and decelerating price pressures [1]. Goldman Sachs noted that the unemployment rate’s decline to 4.1% in July was driven by lower labor force participation rather than employment gains, while underlying job growth slowed to 5,000—well below the estimated 50,000 breakeven level [3].

Market participants have already begun to recalibrate. CME FedWatch data indicates that the probability of a 25 basis point hike to the 3.75%-4% range has fallen to approximately 30% [1]. Consequently, traders have pushed their expectations for the next rate increase from December to January [2]. Despite this shift, two-year Treasury yields remain above 4%, a level Goldman Sachs suggests indicates that the market has not yet fully priced in the bank's more dovish outlook [1].

The outlook for the yield curve

Goldman Sachs anticipates that the US Treasury yield curve will steepen, driven by cooling inflation, fading rate-hike expectations, and persistent concerns regarding the US fiscal outlook [2]. While lower inflation typically supports a bond rally, the bank noted that heavy government borrowing continues to pressure investors to demand higher compensation for holding longer-maturity debt [2].

The bank remains confident that inflation will continue to improve rather than deteriorate as the year progresses [3]. While core personal consumption expenditures (PCE) inflation is on track for a 0.20% increase in July, Goldman Sachs expects downward revisions for certain categories, such as portfolio management services, at the end of September [3].

What to watch

• FOMC Meeting: The Federal Open Market Committee is scheduled to meet on September 15-16, where the committee's decision will clarify whether the current dovish consensus holds [1].
• Inflation Revisions: Market participants should monitor end-of-September data revisions, particularly regarding portfolio management services, which may impact core PCE inflation readings [3].
• Treasury Yields: Watch for movement in two-year Treasury yields; a sustained break below the 4% threshold would signal that the market is aligning more closely with the view that further hikes are off the table [1].

Whether the Federal Reserve’s dovish wing maintains its stance depends on whether the recent cooling in economic data persists or reverses. With market pricing still reflecting a degree of hawkishness, the primary question remains how quickly investors will fully unwind their expectations for further tightening.