Goldman says CPI, not payrolls, holds key to Fed's September call

The view from Goldman runs counter to interpreting the August jobs strength as a direct signal for a September rate increase. Instead, the bank positions next week's Consumer Price Index data as the key determinant for the Federal Reserve's decision. If Goldman's prediction of tame inflation proves accurate, that would undercut the case for higher short-term US interest rates that the stronger employment figures might otherwise imply—a trend with clear consequences for the US dollar and, subsequently, AUD/USD. Also significant is how Goldman characterises the current inflation exceeding the target: as stemming from transitory special factors including tariffs, energy costs, and nonmarket charges. This framing shapes how markets view the durability of any near-term inflation surprise and influences the weight placed on a single CPI release ahead of the meeting.

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According to Goldman Sachs, the employment figures remove a single obstacle to a September rate increase, but the ultimate decision rests on next week's inflation data rather than the jobs report.

Key points:

• Goldman Sachs views the August employment report as indicating a solid labor market that is not overheating.
• Payroll employment exceeded expectations in August, with upward revisions for June and July.
• The unemployment rate remained unchanged near the Fed's estimate of full employment.
• Wage growth and unit labor costs are rising at or beneath levels aligned with 2% inflation.
• According to Goldman, the strong jobs data removes a barrier to a September hike, but inflation data next week will be more decisive.
• The bank anticipates a benign CPI release this week, consistent with its forecast, that would allow the Fed to keep rates steady in September.

Goldman Sachs states that the August employment data reflects a solid but not overheated labor market. The bank argues that inflation figures due next week will be more influential than payroll numbers in determining the Fed's September move. August payroll employment rose beyond forecasts, according to Goldman, with upward revisions to June and July numbers.

Despite the better-than-expected headline figure, Goldman highlighted indications that the labor market is not sufficiently strong to compel action by the Fed. The unemployment rate stayed steady near the Fed's own full-employment estimate, while wages and unit labor costs are advancing at or under levels consistent with the 2% inflation target. Overall, the bank sees the report as eliminating one hurdle to a September rate rise, but not establishing that move as the baseline expectation.

Goldman contends that inflation data next week will be the more critical factor compared to Friday's employment figures. The bank characterises the current deviation above the Fed's inflation target as largely due to special factors that should diminish over the next year, such as tariffs, elevated energy prices, and nonmarket pressures like portfolio management fees. Since the fed funds rate is already within what Goldman calls the neutral range, the bank expects a benign CPI reading next week, matching its own projection, to be sufficient for the Fed to maintain rates unchanged in September.

The contrast Goldman makes—between a jobs report that eliminates a barrier and an inflation report that truly determines the result—highlights how heavily the September decision now depends on a single upcoming data point. Should next week's CPI figure come in higher than expected, Goldman's own analysis indicates that could revive the argument for a rate increase, a case that Friday's employment data on its own did not resolve.