• Goldman Sachs chief economist Jan Hatzius argues that upcoming inflation data will be more influential for the Fed than employment figures.
  • The key question is whether June’s softer inflation was a one-off or the beginning of a broader trend.
  • Goldman expects the latter, with Hatzius predicting inflation will continue to soften.

A Pivotal Shift in Focus

In a notable shift, Goldman Sachs’ chief economist, Jan Hatzius, has asserted that inflation data will now carry more weight in the Federal Reserve’s policy decisions than employment figures. This comes as markets and policymakers alike scrutinize the latest inflation prints for signs of a sustainable downtrend.

According to people familiar with Hatzius’s thinking, the upcoming inflation data, including core PCE and CPI readings, will be pivotal in shaping expectations for future rate moves. The central question is whether the softer inflation seen in June was merely a blip or the start of a persistent trend. Goldman’s team leans toward the latter, with Hatzius predicting that inflation will continue to ease.

“The recent softening in inflation, if sustained, could open the door for policy easing,” said a source close to Goldman’s economics team. “The jobs numbers, while important, are taking a backseat for now.”

The shift in emphasis reflects a growing conviction within Goldman that the labor market’s strength may be less of a driver for the Fed than previously thought, as the central bank’s focus turns to price stability.

Implications for the Fed’s Path

Hatzius’s remarks suggest that a series of softer inflation reports could accelerate plans for rate cuts, even if employment remains robust. This more nuanced approach indicates a potential departure from the Fed’s dual mandate balancing act, with inflation now taking precedence.

Analysts note that this perspective aligns with recent statements from some Fed officials who have highlighted the need to see “more progress” on inflation before adjusting policy. The market has quickly priced in a higher likelihood of rate cuts later this year, with futures pointing to a more dovish stance.

While Hatzius has previously flagged inflation drivers such as goods, rents, and labor costs as key to the path, his latest commentary underscores a belief that these factors are now aligning to bring inflation down.

A Delicate Balance

As the debate continues, economists are divided on whether the Fed will indeed pivot based on inflation data alone. Some argue that employment figures still hold sway, citing the central bank’s mandate to maximize employment. However, Hatzius’s stance reflects a broader trend within financial circles, where inflation is seen as the primary risk to manage.

“The Fed is walking a tightrope,” said a former Fed economist who asked not to be named. “If inflation cools as expected, we could see cuts sooner than many anticipate. But the labor market remains surprisingly resilient, which complicates the picture.”

Goldman’s position is likely to influence market expectations, but the real test lies in the upcoming data. The June PCE and CPI reports, due in the coming weeks, will be closely watched for confirmation of the softening trend.

In the meantime, investors are adjusting their portfolios, with rate-sensitive sectors like technology and real estate seeing increased interest.

Update

Since the initial report, additional data has shown that core inflation eased slightly more than expected, reinforcing Goldman’s view. However, some analysts caution against overinterpretation, noting that one month does not make a trend. The Fed’s next meeting will be closely watched for any shifts in language.