Goldman Sachs says Fed rate hike unlikely in September

Investing.com -- Goldman Sachs said a Federal Reserve interest rate increase at the September meeting has become very unlikely following two months of weaker jobs and inflation data.

The investment bank said only 4-5 of the 12 voting Federal Open Market Committee members appeared inclined toward rate hikes as of the June meeting, when 9 of 18 participants who submitted projections indicated support for increases in 2026. Three members dissented at the July meeting in favor of tighter policy.

Goldman Sachs said it does not expect dovish committee members to shift toward supporting hikes after the recent economic data. The firm said market pricing for the federal funds rate remains too hawkish under its baseline economic forecasts.

US retail sales fell in July, which Goldman Sachs partly attributed to timing effects from Amazon Prime Day. The firm said the data now aligns more closely with its view that strong consumer spending in the spring was temporary and driven by tax refunds. Real consumer spending growth is expected to slow to 1-1.5% in the second half of the year as real cash flow stagnates.

The bank's estimate of underlying trend job growth slowed to just 5,000 in July, below its estimated breakeven level of 50,000. Both nonfarm payrolls and household employment declined during the month. The unemployment rate fell from 4.5% in December to 4.1% in July, but Goldman Sachs said this decline was driven by lower labor force participation rather than higher employment.

Core personal consumption expenditures inflation is on track for 0.20% in July following a 0.13% increase in June. More than half of the July gain is expected to come from portfolio management services, a category Goldman Sachs said is poorly measured and will face downward revisions at the end of September. The firm continues to expect core PCE inflation to fall to near 2% in 2027.

The closed Strait of Hormuz poses downside risks to consumer spending, as a renewed spike in gasoline prices would particularly affect lower and middle-income households, Goldman Sachs said.

The firm said it remains comfortable with its call that the European Central Bank will raise rates by 25 basis points in September, with the next move expected to be downward in mid-2027.

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