For the past two years, Nonfarm Payrolls (NFP) have almost always been the core data driving Federal Reserve policy expectations and market pricing. However, Goldman Sachs argues that this logic is shifting. As U.S. employment cools markedly and uncertainties linger over the inflation trajectory, the bank’s latest judgment is that inflation data will likely carry greater weight than employment figures in the period ahead.
At the same time, Ashok Varadhan, Co-Head of Global Banking & Markets at Goldman Sachs, put forward a more direct market strategy: even amid elevated interest rates and volatile oil prices, the optimal move for investors at present is to “stay invested”.
Goldman Sachs’ overarching rationale is that the Fed may refrain from further rate hikes later this year, energy prices are set to gradually ease, and the resilience of the U.S. economy alongside productivity gains driven by artificial intelligence will continue to underpin risk assets.
Goldman Sachs: Stop Fixating on NFP, Inflation Is the Real Decisive Factor
Jan Hatzius, Chief Economist of Goldman Sachs, stated on August 7 that the Federal Reserve will likely attach more importance to inflation performance than employment data in its upcoming policy decisions.
Hatzius pointed out that the pivotal question is whether the June slowdown in inflation was merely a one-off blip or the start of a broader cooling trend. Goldman Sachs leans toward the latter scenario and forecasts inflation will keep declining from current levels.
“I truly believe inflation prints will be more important than employment numbers,” Hatzius remarked. Upcoming releases will help determine if the favorable June inflation reading was an isolated incident or the beginning of a softer inflationary path.
This assessment does not mean Goldman Sachs is disregarding the labor market; rather, it views inflation as the more critical variable when the Fed maps out its next interest rate course.
Employment Market Cools Noticeably, Yet Policy Direction Hinges on Price Levels
This revised outlook comes as the U.S. labor market sends clear signals of a slowdown.
Only 23,000 nonfarm jobs were added in July, far below the market consensus of 83,000; June’s job gains were also revised down to a mere 20,000. Meanwhile, the unemployment rate edged down to 4.1%, but Hatzius attributed this largely to a sharp drop in the labor force participation rate instead of a strengthening job market.
Goldman Sachs even described the current U.S. economy as hovering near “stall speed”.
Nevertheless, even with a pronounced weakening in employment, Goldman Sachs holds the view that the Fed will not pivot to accommodative policies solely on the back of softer jobs data. Policymakers will remain cautious if the pullback in inflation lacks sustainability.
In other words, what the market truly needs to confirm in the next phase is not whether employment deteriorates further, but whether inflation has entered a steady downward channel.
Goldman Sachs Expects No Additional Rate Hikes for the Rest of the Year
While the market is still betting on potential renewed policy tightening by the Fed, Goldman Sachs’ internal baseline forecast is far more dovish.
Varadhan said he does not anticipate another Fed rate hike later this year and expects benchmark rates to stay unchanged.
“I don’t think we will see rate hikes in the latter half of the year,” he said. “I expect interest rates to remain on hold.”
This outlook diverges from current market pricing. Though traders scaled back hike bets following the weak NFP report, markets still price in a chance of further tightening in the coming months.
This implies that if Goldman Sachs’ projection proves correct, the market is currently overestimating the Fed’s hawkish stance going forward.
Oil Prices May Dip Below $70, Alleviating Inflationary Pressures
One key reason behind Varadhan’s muted view on further tightening is the projected gradual dissipation of some inflationary headwinds.
He noted that certain price drivers including tariffs are starting to fade. Should geopolitical tensions around the Strait of Hormuz ease further, energy costs could fall sharply and ease inflation pressures even more.
Varadhan projected that crude oil prices will decline markedly over time and could drop below $70 per barrel in late 2026.
“I expect energy prices to retreat,” he stated. “Oil could fall under $70 a barrel later this year, potentially even lower.”
That said, oil prices remain highly volatile in the short term. WTI crude rebounded above $80 per barrel on Monday, as markets cast doubt over whether the U.S. and Iran can swiftly reach an agreement to restore unimpeded vessel passage through the Strait of Hormuz.
Therefore, energy prices will remain a pivotal variable shaping the inflation outlook. PeRSIstently elevated oil costs cannot fully rule out a prolonged restrictive policy stance from the Fed.
AI to Shift from an Inflation Driver to an Inflation Buffer
Beyond energy costs, Varadhan also highlighted artificial intelligence’s long-term impact on inflation and economic growth.
In his view, AI infrastructure build-out will consume massive amounts of capital, energy and resources in the near term and stoke modest inflation pressures. Yet once the infrastructure is fully deployed, productivity enhancements powered by AI will exert the opposite effect.
Improved productivity allows companies to boost output without a meaningful rise in operating costs, sustaining economic expansion while dampening peRSIstent inflationary pressures.
Goldman Sachs regards this as a critical structural tailwind for the U.S. economy in the years ahead.
Economic Resilience Continues to Underpin Risk Assets
The third major factor underpinning Varadhan’s positive market view is the underlying resilience of the U.S. economy.
Despite successive shocks including high interest rates, Middle East conflicts, surging energy prices and shifting trade policies, nominal baseline growth has proven remarkably resilient.
The U.S. economy is poised to keep expanding as some external headwinds fade and AI lifts productivity levels.
This economic resilience also leaves Varadhan constructive on credit markets. He explained that heavy bond issuance would normally warrant higher risk compensation for investors, but robust economic fundamentals have prevented a sharp widening in credit spreads.
As exogenous shocks recede and economic momentum holds up, actual default rates are likely to stay relatively contained.
“Stay Invested” Becomes Goldman Sachs’ Core Trading Strategy
Built on this set of macro assessments, Varadhan delivered a clear market recommendation: “My advice is to stay invested.”
The core logic behind this suggestion is not a straightforward bet on Fed rate cuts, but a favorable macro cocktail taking shape: softer employment reduces the need for additional tightening, inflation is set to cool gradually, energy prices are poised for a pullback, while AI and economic resilience continue to bolster growth.
For investors, this means the market’s anchor is shifting from the singular focus on NFP strength and the timing of rate cuts to a more complex framework: whether inflation cools sustainably, if oil prices correct lower, and whether the economy can withstand high interest rates without recession.
If subsequent inflation data validates the disinflation trend seen since June, market fears over further Fed tightening will ease further, lending stronger support to risk assets. Conversely, a rebound in inflation, especially driven by renewed sharp spikes in energy prices, could trigger a repricing and correction in current bullish market valuations.