Goldman Sachs says the August employment report clears one hurdle to a Federal Reserve rate hike in September, but argues that next week's inflation print, not payrolls, will actually decide the outcome.

The bank describes the August employment report as consistent with a solid labor market, but not an overheating one. Payroll employment rose by more than expected in August, while job growth in June and July was revised higher. Despite the stronger headline print, Goldman pointed to signs that the labor market is not running hot enough to force the Fed's hand: the unemployment rate held flat near the central bank's own estimate of full employment, and both wages and unit labor costs are growing at or below levels consistent with the Fed's 2% inflation target. That matters because the Fed's policy decisions are formally anchored to its dual mandate of maximum employment and price stability, so a labor market sitting near full employment without wage pressure shifts the deciding weight toward the inflation side of the mandate.

Taken together, the bank views the report as removing one obstacle to a rate increase at the September meeting, without making that outcome the base case. Goldman argues the more decisive input will be next week's inflation data rather than Friday's jobs numbers — a sequencing that reflects the calendar as much as the economics, since the CPI release is one of the final major data points markets will see before the Fed's decision.

The bank frames the current overshoot of the Fed's inflation target as largely driven by special factors it expects to fade over the coming year, including tariff effects, higher energy prices, and nonmarket price pressures such as portfolio management fees. This reading sits within a broader debate among economists about how much of the recent inflation overshoot reflects transitory, one-off forces versus more persistent demand-driven pressure. With the fed funds rate already sitting in what Goldman characterises as the zone of neutrality, the bank expects a benign CPI report next week, in line with its own forecast, to be sufficient for the Fed to hold rates steady in September rather than move.

The distinction Goldman draws — between a jobs report that removes an obstacle and an inflation report that actually decides the outcome — underscores how much of the September call now rests on a single data point still to come. If next week's CPI print surprises to the upside, Goldman's own framework suggests that could reopen the case for a hike that Friday's employment data alone did not settle.

Goldman's view pushes back against a simple read-through from August's jobs strength to a September hike, framing next week's CPI print as the real swing factor for the Fed decision. If Goldman's benign inflation call proves right, that argues against further upside in short-term US rates that stronger jobs data alone might suggest — a dynamic with direct implications for the US dollar and, by extension, AUD/USD. The bank's framing of the current inflation overshoot as driven by fading special factors, including tariffs, energy prices, and nonmarket costs, also matters for how durable any near-term inflation surprise is judged to be, shaping how much weight markets place on a single CPI print heading into the meeting.

Source: Investinglive