Goldman Says Fed September Hike Unlikely, Pricing Still Hawkish

Goldman Sachs argues the Federal Reserve will not raise rates in September, leaving hawkish market pricing room to unwind.

Goldman Sachs sees a September Federal Reserve rate hike as highly unlikely, arguing that cooling consumption, a near-stalled labor market and improving inflation have removed the case for tightening even as market pricing still leans hawkish. The firm's base case leaves room for Treasury yields to fall and equities to extend gains into year-end.

"A hike at the September FOMC meeting has become very unlikely unless August data show a dramatic shift, which is not our base case," said Jan Hatzius, chief economist at Goldman Sachs, in global macro research published Aug. 16.

The call rests on three converging trends rather than any single data point. July retail sales fell partly because Amazon Prime Day moved earlier, but the deeper driver is that spring's strong real consumption reflected a temporary surge in tax refunds; Goldman now sees second-half real consumption growth slowing to 1%-1.5%. Unemployment fell to 4.1% in July from 4.5% in December, yet the decline reflects falling labor-force participation rather than job gains — trend employment growth has slowed to about 5,000 a month versus the roughly 50,000 needed to hold the jobless rate steady.

The stakes extend beyond the September meeting. Goldman estimates that of the 12 voting FOMC members, only four to five lean toward a hike, even as the June dot plot showed nine of 18 participants projecting tightening in 2026 and July produced three dissents. With inflation and jobs data running soft, the firm argues the market's hawkish rate path has room to move lower, supporting a steeper Treasury yield curve and further equity gains into year-end.

Inflation's July Blip Masks a Softer Core Trend

Core PCE rose 0.13% in June and an estimated 0.20% in July, but more than half of July's increase came from portfolio management services, a component whose measurement is contested — fees scale with asset values rather than prices — and which is expected to be revised down sharply in late September. Tariff, software and energy price pressures are also fading, leaving core PCE on a path toward roughly 2% by 2027.

ECB Hike Looks Like a One-Off Before 2027 Cuts

Across the Atlantic, Goldman maintains its base case for a 25-basis-point European Central Bank hike in September, but argues the next move after that is more likely a cut around mid-2027. The French presidential election is entering market view, with the first round set for April 18, 2027 and a runoff on May 2; model-based probabilities put Marine Le Pen's win chance near two-thirds, though the outcome hinges on her runoff opponent.

European equities remain structurally detached from the region's economy, a gap Goldman sees persisting. Stoxx 600 earnings per share rose 14% in the first half while nominal GDP grew just 3.3% and real GDP 0.7%; the index has outperformed the S&P 500 over the past 18 months, and European banks have beaten US mega-cap technology since 2022. With valuations still reasonable, the firm expects Stoxx 600 to keep outperforming.

The dovish read on US policy is already rippling through currency markets. The dollar has softened ahead of US retail sales data, lifting risk-sensitive currencies such as the Australian dollar toward 0.6570, while the New Zealand dollar gained after the Reserve Bank of New Zealand held its cash rate at 5.5% and pushed back against early easing bets. If September's data confirm Goldman's view, the repricing lower in rate expectations would likely extend the dollar's decline and keep high-yield currencies supported.

This article is for informational purposes only and does not constitute investment advice.