U.S. inflation data have softened in the last few months, lowering the odds of a rate increase next month

Retail sales dropped in July and the consumer will remain under pressure owing to high energy prices, Jan Hatzius writes

After materially softer jobs and inflation data in the last few months, Goldman Sachs economists doubt enough members of the Federal Open Market Committee will shift toward a hawkish stance ahead of the next rate decision during their Sept. 15-16 meeting to prompt a rate hike. Barring any surprising or dramatic August data releases in early September, the Fed will stand pat, the team said.

The Goldman call came from its chief economist Jan Hatzius in an Aug. 16 note, in which he forecast that "inflation news is more likely to improve further than to deteriorate anew as the year progresses. Hence we think the market pricing for the funds rate (FF00) is too hawkish." The chances of a 25-basis-point rate increase are about 30%, according to CME FedWatch.

Fed pricing has turned less hawkish, but there is further to go

Hatzius considered recent economic releases and concluded, "they're not hiking." This would include retail-sales figures announced last Friday, which indicated that consumer spending growth will slow to 1-1.5% in the second half, mostly owing to a renewed spike in gasoline prices stemming from ongoing disruptions to shipping in the Strait of Hormuz.

Some of the enthusiasm around consumer spending in the first half of 2026 stemmed from tax refunds, Hatzius said. While the strength in the equity market may create a mild, supportive wealth effect, he said he expects economic activity will remain below potential in the second half.

Jobs data also reinforces Hatzius' views, with the underlying trend job growth just 5,000 in July - considerably below its break-even figure of 50,000 monthly. The report also highlighted anemic wage growth, which he said goes against the notion that the labor market is tightening.

It's the inflation data that gave Hatzius the most confidence in his call, though. Core personal-consumption expenditures - the Fed's preferred inflation measure - is on target for 0.2% in July. He expects other temporary inflation drivers - like tariffs and energy - will subside sooner or later. Hatzius said he expects core PCE to fall to 2% annualized in 2027.

At the last FOMC, Hatzius estimates only four to five out of 12 members were in favor of a hike, and the tone of recent data is unlikely to increase that number.

-Jules Rimmer