Goldman Sachs trader: Now, everything depends on September's non-farm payrolls

Federal Reserve Chairman Jerome Powell has paved the way for a rate cut in September at the Jackson Hole central bank annual meeting, but the key lies in whether the upcoming non-farm payroll data can provide decisive guidance on the pace and magnitude of the rate cut.

On August 23, Rikin Shah and other traders from Goldman Sachs' Fixed Income, Currency and Commodities (FICC) department stated that the market had been in a wait-and-see mode ahead of the Jackson Hole meeting. Powell's latest remarks have opened the green light for a rate cut in September, especially against the backdrop of recent employment data revisions that have drawn the Fed's attention to the labor market.

This is a typical example of the "downside risks to the labor market" that Powell mentioned at the last FOMC press conference and reiterated in his speech at the Jackson Hole central bank annual meeting. Goldman traders believe that if the August non-farm payroll growth is below 100,000, especially in the face of political pressure, it will help determine a rate cut in September.

Goldman pointed out that if the labor market continues to weaken, the window of opportunity is now. The bank believes that regardless of whether the scenario is an economic slowdown or normalization, the Fed is likely to complete this round of rate cuts before the next Fed chair takes office, that is, before the first half of 2026 ends.

Employment Data Revisions Raise Concerns

Goldman noted that revisions to future employment growth are more likely to lean negative for several reasons.

First, the birth-death model may be overly optimistic;

Second, in past economic slowdowns, revisions to original employment data have often been negative;

Third, ADP data raises questions about the healthcare industry's employment growth in the official report;

Finally, the household survey currently overestimates immigration and employment growth.

The bank emphasized that the outlook for employment growth is similarly bleak. Like the slowdown in activity growth this year, the slowdown in employment growth seems to stem not only from the direct impacts of trade and immigration policy changes.

Goldman is particularly concerned that the "catch-up hiring" in a few industries now seems to have ended, with employment growth outside these industries dropping to near-zero levels. The bank believes:

“There is currently a huge uncertainty regarding the balanced pace of employment growth, if the balanced level is indeed as estimated by Goldman’s Global Investment Research department at around 80,000, then the average growth data of 35,000 over three months is concerning.”

Additionally, the significant revisions to July's data have also raised concerns at the Fed. The Fed may worry about what would happen if an economic slowdown is imminent and they react too late. This concern could prompt them to take more aggressive rate-cutting actions.

Rate Cut Path Depends on Labor Market Performance

Looking ahead to September and beyond, the window for the possibility of a more significant slowdown in employment data is now.

Goldman stated that the market has passed the most severe tariff uncertainties, and if the next two data releases rebound to higher levels, then the current weakness may just be a temporary fluctuation.

Goldman emphasizes that the market's attention to the August non-farm data is extremely high, and considering the scale of previous data revisions, this level of attention is concerning. The Federal Reserve is on track for a rate cut in September, after which it will "cautiously observe" the U.S. labor market for further signs of sharp weakness to determine whether the subsequent path will be continuous rate cuts or a slow normalization.

The rate cut cycle may be completed in the first half of 2026

Goldman Sachs believes that regardless of whether in a slowdown or normalization scenario, there is a high likelihood that the rate cut cycle will have ended by the time the next Federal Reserve Chair takes office. Jerome Powell's term as Fed Chair will end in May next year.

Notably, the U.S. yield curve for June 26/28, 2026, is currently flat, providing room for contemplation on future policy paths.

Goldman Sachs summarizes that Powell has given the green light for a rate cut in September, but the actual pace of rate cuts and subsequent trajectory will still depend on the August employment data. Based on multiple concerns, Goldman Sachs maintains a cautious attitude towards the labor market.

If weakness is to come, it will be in the next few data releases; if not, then the current weakness may just be a fleeting moment. In any case, as rate cuts are about to begin, Goldman Sachs believes it is very likely that the Federal Reserve will end the rate cut cycle in the first half of 2026