For most of the past two years, investors have treated the monthly jobs report as the most important number in the economy. Strong hiring meant the Fed could hold rates higher. Weak hiring meant cuts were coming. The relationship was simple enough that markets moved predictably on the first Friday of every month.
Goldman Sachs is now saying that calculus has changed. The jobs number still matters. But something else matters more right now.
Jan Hatzius on why inflation matters more than jobs to the Fed
Jan Hatzius, Goldman’s chief economist, said on August 7 that the Federal Reserve is likely to place greater weight on inflation data than employment in future policy decisions. The key question, Hatzius said, is whether June’s inflation slowdown was a one-off or the start of a broader trend. Goldman sees the latter as more likely, and expects inflation to cool further from here, according to CNBC.
“I do think the inflation numbers are going to be more important than the employment numbers,” Hatzius said on CNBC’s Squawk on the Street. He added that the upcoming inflation figures could “tell us whether the very good June inflation numbers were a one-off or maybe the start of a softer trend.” That view reflects a change in emphasis rather than a dismissal of the labor market. Goldman believes inflation is currently the more critical variable for determining where interest rates go next.
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The context matters. The July nonfarm payroll figure fell 23,000, far below the estimated gain of 83,000 added jobs, with June’s figure also revised down to a gain of just 20,000. The unemployment rate dropped to 4.1%, but Hatzius said that was driven by a “big” drop in labor force participation, not genuine strength. Goldman described the economy as running at “stall speed.” Yet Hatzius was still pointing at inflation, not the labor market collapse, as the Fed’s main focus. That combination tells you something about how Goldman sees the policy moment.
Goldman Sachs Fed rate cut forecast for 2026 and 2027
Goldman has moved its rate cut call around a lot this year. In May, the bank pushed its forecast for the first cut back to December 2026. The reasoning was straightforward: PCE inflation was still running near 3%, energy costs from the Iran conflict were feeding into broader prices, and the Fed wasn’t close to being done, according to Investing Live. The Fed held rates at 3.50% to 3.75% at its April meeting. Chair Kevin Warsh said inflation had moved higher and left it at that.
Then the May jobs report came in stronger than anyone expected, 172,000 nonfarm payrolls against an 80,000 to 85,000 consensus. David Mericle, Goldman’s chief U.S. economist, published a note on June 6 removing the bank’s two 2026 rate cut calls entirely and replacing them with quarter-point reductions in June and December 2027, a full six-month delay from the prior timeline. The Nasdaq 100 fell 5% on the day the data were released. Goldman also doubled its estimated probability of a modest rate hike to 20%, though it stopped short of making that its base case, as TheStreet reported. Goldman assigns only 30% odds to its two-cut 2027 scenario, reflecting genuine uncertainty about whether that path holds.
That is a materially more patient timeline than what markets have been pricing. Goldman believes the Fed will want sustained evidence that inflation is converging toward 2% before easing policy. One soft inflation report is not sufficient. Several consecutive ones might be.
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Why Goldman Sachs says inflation beats jobs data for Fed policy
The Fed has a dual mandate: stable prices and maximum employment. For most of 2025, the two goals pointed in opposite directions. Inflation was too high to cut and unemployment was too low to worry about. The policy choice was essentially forced: hold rates and wait.
What’s changed in mid-2026 is that the two goals are starting to pull in the same direction in a more complicated way. Employment is weakening, but inflation is also showing signs of cooling after June’s favorable data. The question Hatzius is raising is: which measure is the Fed actually watching most closely to decide when to move?
His answer is inflation. If the next consumer price and PCE reports confirm that June’s improvement was real and durable, the case for rate cuts strengthens even with a weak labor market. If inflation reaccelerates, the weak jobs number won’t be enough to force the Fed’s hand. Goldman’s view is that this is an inflation-first moment, not an employment-first one.
Goldman’s inflation verdict and what it means for bonds and stocks
Markets have been waiting for a clear signal on rates all year. Goldman is now giving them one place to look for it. Inflation cools further and long-duration bonds rally, growth stocks recover, housing gets cheaper to finance. That’s the good outcome. Investors know what to buy if that’s where this goes.
A renewed pickup in inflation would produce the opposite. Bond yields would rise, rate-sensitive stocks would come under pressure, and investors would rotate toward companies with strong pricing power and current cash flows. The dollar could also respond: a more dovish Fed path tends to weaken the dollar, while persistent inflation and higher-for-longer rates support it.
Goldman has previously cited tariffs, higher energy costs tied to the Iran conflict, and geopolitical pressures as factors that could keep inflation stickier. The bank is not treating one favorable June report as proof that the inflation fight is won. It is watching the next several reports to see whether the improvement holds. So, it says, should investors.
Related: UBS sends strong verdict on food inflation, economy
