Goldman Says No September Hike — Can Today’s Data Change That Thesis?
Last week’s Treasury bond intervention has revived questions about a September interest-rate hike. Although the Fed does not meet until Sept. 15, this week could materially shape that decision, with personal consumption expenditures (PCE) data and the Jackson Hole summit.
According to Goldman Sachs, a September rate increase remains unlikely. The bank is betting that softer retail sales, weaker employment data and cooling inflation will keep policymakers on hold. In a note, chief economist Jan Hatzius said the bank still sees market pricing as too hawkish.
Yet CME FedWatch still shows a 36.1% chance of a 25-basis-point hike, with plenty of leeway to change over a two-day window that could reset expectations.
Slow Disinflation, Sticky Core
According to Morningstar, FactSet sees headline PCE rising 0.07% in July after June’s rare negative print of 0.11%, with the year-on-year rate easing to 3.6% from 3.7%. Core PCE, the Fed’s preferred gauge, is expected to hold near 3.2% to 3.3% year over year.
The problem for doves is that inflation remains above the Fed’s 2% target for the 65th straight month. Christopher Hodge, Natixis’ chief U.S. economist, said there is "no longer evidence that tariffs are affecting inflation data," but added that computer hardware and software tied to AI and data-center spending are still pushing prices higher.
Goldman’s Chief U.S. Economist David Mericle sees another source of stickiness in portfolio management fees, estimating that equity-market gains could add 0.11 percentage points to monthly core PCE. UBS has also flagged the slow rise of AI-related pricing in the inflation basket.
There is also a statistical complication. The BEA plans methodology updates in September that could retroactively alter July’s numbers, making the initial read harder to interpret.
Warsh Faces a Communication Test
Fed Chair Kevin Warsh faces his debut Jackson Hole speech after a deeply divided July meeting and amid rising bond yields.
That situation leaves him in a difficult spot. Investors want a clearer policy reaction function, especially as long-dated Treasury term premiums have risen. Will Warsh validate the hawkish dissent, or lean toward patience and data dependence?
"Warsh’s ‘resolute commitment’ to lower inflation is not good enough for the market," Mark Cabana, Bank of America Global Research’s head of U.S. rates strategy, said according to the Financial Times. "We need to hear details of the Fed’s plan to get inflation down."
A benign PCE figure could reinforce Goldman’s patience thesis. A stronger print, particularly in core services, would validate the FOMC’s hawkish minority and intensify speculation about higher terminal rates.
Bonds, Buybacks and the Long-End Problem
The Treasury market is already under strain from supply. A roughly $2 trillion deficit and heavy bill issuance are forcing investors to absorb more short-term debt, even as the Treasury tries to ease pressure at the long end through unscheduled buybacks.
Treasury Secretary Scott Bessent’s intervention has helped lower longer-dated yields, but the strategy — funding purchases with shorter-duration debt — places more reliance on lower policy rates. It also clashes with Warsh’s earlier view that higher long-end yields can reflect healthier market price discovery.
That scenario leaves PCE as the week’s key repricing risk. The market has no idea which direction Warsh’s Jackson Hole debut might go, but PCE data will arrive in a familiar format.
If PCE surprises higher, tighter-rate expectations, reduced Fed bill buying, and heavy fiscal supply could push Treasury yields higher, adding strain to the market.
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