Goldman Sachs Chief Economist Jan Hatzius has made a fresh assessment, stating that a Federal Reserve rate hike in September is "highly unlikely." A triple confluence of cooling consumer spending, near-stagnant employment trends, and sustained improvement in inflation is fundamentally dismantling the case for raising rates. Market pricing for interest rates remains hawkish, leaving room for downward adjustments. Goldman Sachs maintains its outlook for a steeper yield curve and a continued rally in U.S. stocks to new highs by year-end. In Europe, the European Central Bank (ECB) may raise rates by 25 basis points in September, but the next move is more likely to be a cut.
U.S. consumer, employment, and inflation data are collectively weakening the rationale for a September rate hike, while market pricing of the rate path is still hawkish, suggesting room for adjustment. According to reports, Goldman Sachs' chief economist, Jan Hatzius, noted in a global macro research piece released on August 16 that a rate hike at the September FOMC meeting has "become very unlikely" unless there is a dramatic shift in August data released early next month—which is not his base case. This assessment is not based on a single data point but on a synchronized shift in three key trends: cooling consumption, employment trends nearing a standstill, and improving inflation. For investors, the core takeaway is that even though market pricing of the federal funds rate has already pulled back somewhat, the current path assumptions still indicate there is room for pricing to move toward lower rates. Meanwhile, the firm maintains its asset allocation direction of a further steepening of the U.S. Treasury yield curve and continued gains in major stock indices through year-end.
The rebound in consumption was a temporary spike, with second-half growth set to compress to 1%-1.5%. The decline in July retail sales has a technical explanation: Amazon Prime Day occurred earlier than usual, partially pulling forward demand. However, the report points to a deeper cause. The revised consumption path shows that the strength in U.S. real consumer spending this spring was primarily driven by a temporary income boost from a surge in tax refunds, rather than a fundamental strengthening of the household sector. As real cash flow stagnates, real consumption growth is expected to slow to 1%-1.5% in the second half of the year, with overall economic growth likely falling slightly below potential. The risks to the consumption forecast are also skewed to the downside. The Strait of Hormuz remains effectively closed, and if gasoline prices rise again, the impact would fall disproportionately on lower- and middle-income households. Business investment remains strong, and the wealth effect from the earlier stock market rally will provide a lagged boost to GDP, but this is unlikely to offset the drag from consumption.
The decline in the unemployment rate masks a substantive weakening of the labor market. Superficial data appears contradictory: the U.S. unemployment rate fell from 4.5% in December last year to 4.1% in July this year, which does not directly support a narrative of "weakening employment." However, the report indicates this decline should not be interpreted in the usual way. Both July nonfarm payrolls and household survey employment declined month-over-month. Estimated trend employment growth has fallen to around 5,000 per month, far below the roughly 50,000 breakeven pace needed to keep the unemployment rate stable. If this pace continues in the coming months, the previous decline in the unemployment rate is likely to be partially reversed. Crucially, the driver of the falling unemployment rate is primarily a decline in the labor force participation rate, not an increase in the employed population. A retreat in the employment-to-population ratio is evident in both the aggregate data and a version adjusted for demographic changes. Meanwhile, wage growth continues to weaken, further undermining the case that the labor market is tightening.
July's inflation reading was inflated, but the core PCE trend has not been reversed. Over the past two months, U.S. inflation has shown a general improvement. Core PCE rose 0.13% month-over-month in June and is expected to rise 0.20% in July. The July reading appears slightly high, but Goldman Sachs points out that over half of the increase came from the portfolio management services component, whose measurement methodology is itself controversial—when asset bases expand and fixed-percentage management fees rise accordingly, most people do not view this as a price increase. Furthermore, this component is expected to undergo a significant downward revision at the end of September and has a history of repeated revisions. Other temporary inflationary factors, such as tariffs, software and accessories, and energy prices, are also on a declining path. The overall trajectory of core PCE inflation approaching 2% by 2027 has not been altered by the single July reading.
Market pricing for rate hikes is hawkish, leaving room for the rate path to adjust downward. The June dot plot showed that 9 of the 18 FOMC participants who submitted forecasts anticipated a rate hike in 2026, but an estimate based on voting members suggests that only about 4 to 5 of the roughly 12 voting members truly favor a hike. The July meeting saw three explicit dissents, with the hawkish voices expanding somewhat. However, with employment and inflation data both clearly soft over the past two months, the likelihood of dovish members switching to support a rate hike under this data combination is extremely low, making the bar for a September hike very high. In terms of asset pricing, Goldman Sachs' path assumptions point in a broadly consistent direction across several areas: improving inflation and a declining rate-hike premium, combined with fiscal concerns, all point to a further steepening of the U.S. Treasury yield curve; strong second-quarter corporate earnings and a stabilizing AI trade have pushed major stock indices to new highs, with the upward path still intact through year-end; in foreign exchange, global inflation is generally mild, which favors high-yield currencies continuing their strength, with the U.S. dollar maintaining an advantage over the Canadian dollar, and the euro over the Swiss franc.
The ECB may hike rates by 25 basis points in September, but the next move looks more like a cut. Europe's macroeconomic challenge lies in high energy prices, while core inflation is only moderately above target. Under this combination, Goldman Sachs maintains its base case of a 25-basis-point ECB rate hike in September but simultaneously notes that the next move after this hike is more likely to be a cut, timed around mid-2027. On the political risk front, the 2027 French presidential election has already come into market focus. The first round is scheduled for April 18, 2027, with the runoff between the top two candidates on May 2. A model based on polls suggests Marine Le Pen currently has about a two-thirds probability of winning the presidency. The composition of her runoff opponent is crucial: if she faces former Prime Minister Edouard Philippe or another centrist candidate, the second round remains competitive; if her opponent is Jean-Luc Melenchon, Le Pen would almost certainly win. Current first-round polls show Philippe in second place and Melenchon in third, though the latter has a history of outperforming polls. Notably, there is a structural disconnect between European stock markets and the European economic fundamentals. The automotive sector accounts for only about 1% of market capitalization, limiting its drag on indices; higher oil prices are negative for European GDP but positive for index performance, as oil and gas producers have a significant weight in the Stoxx 600. In the first half of this year, Stoxx 600 earnings per share grew by 14%, while nominal GDP growth was only 3.3% and real GDP growth was just 0.7%. Over the past 18 months, the Stoxx 600 has outperformed the S&P 500; since 2022, European bank stocks have significantly outperformed U.S. mega-cap tech stocks. The report argues that current European valuations remain reasonable, and the Stoxx 600 has the conditions to continue outperforming.
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