Goldman Sachs trader: The pace and extent of the Federal Reserve's rate cuts will depend on the September non-farm payrolls.

Federal Reserve Chairman Powell paved the way for a rate cut in September at the Jackson Hole central bank annual meeting, but the key still lies in whether the upcoming non-farm payroll data can provide a decisive guidance for the pace and magnitude of the rate cut. On August 23, Goldman Sachs Fixed Income Department (FICC) trader Rikin Shah and others stated that the market had been in a wait-and-see mode before the Jackson Hole meeting. Powell's latest remarks have given the green light for a rate cut in September, especially against the backdrop of recent revisions in employment data that have raised the Fed's concerns about the labor market. This is the typical example of the "downside risks in 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 Sachs traders believe that if non-farm payroll growth in August is less than 100,000, especially in the face of political pressure, it will help determine a rate cut in September. Goldman Sachs points out that if the labor market weakens further, the time window is now. The bank believes that whether in an economic slowdown or normalization scenario, the Fed is likely to complete this round of rate cuts before the next Fed Chair takes office, by the first half of 2026. Concerns sparked by employment data revisions Goldman Sachs notes that future employment growth revisions are more likely to be negative, for various reasons: First, the birth-death model may be overly optimistic; Second, in past economic slowdowns, revisions to original employment data have tended to be negative; Third, ADP data questions the official report on healthcare industry employment growth; Lastly, household surveys now overestimate immigrant and employment growth. The bank emphasizes that the prospects for employment growth are also bleak. Similar to the slowdown in activity this year, the slowdown in employment growth appears to come not only from direct impacts of trade and immigration policy changes. Goldman Sachs is particularly concerned that the "catch-up hiring" in a few industries seems to have ended, and employment growth outside of these industries has dropped to near-zero levels. The bank believes: "There is significant uncertainty about the pace of balanced employment growth; if the balanced level is indeed around 80,000 as estimated by Goldman Sachs' Global Investment Research Department, then the growth data averaging 35,000 over three months is worrying." In addition, the significant size of the revisions in July data is also worrisome for the Fed. The Fed may be concerned about what to do if an economic slowdown is imminent and they react too late. This concern may prompt them to take more aggressive rate cut actions. Rate cut path depends on labor market performance Looking beyond September, the current window for showing a larger slowdown in employment data is now. Goldman Sachs states that the market has passed the most serious tariff uncertainties, and if the next two data releases rebound to higher levels, the current weakness may only be a temporary fluctuation. Goldman Sachs emphasizes that the market is highly focused on the August non-farm payroll data, and given the scale of previous data revisions, this level of attention is worrisome. The Fed is on track for a rate cut in September, and will "carefully observe" the U.S. labor market afterward, looking for signs of further sharp weakness to determine whether the next steps will involve consecutive rate cuts or slow normalization. Rate cut cycle may end in the first half of 2026 Goldman Sachs believes that regardless of an economic slowdown or normalization scenario, it is highly likely that the rate cut cycle will be over by the time the next Fed Chair takes office. Powell's term as Fed Chair ends in May next year. It is worth noting that the U.S. yield curve on June 26/28, 2026 is currently flat, providing room for thinking about future policy paths. In conclusion, Goldman Sachs states that Powell has given the green light for a rate cut in September, but the real decision on the pace and subsequent trajectory of the cut still lies in the August employment data. Based on multiple concerns, Goldman Sachs remains cautious about the labor market. If weakness is to come, it will be revealed in the next few data releases; if not, then the current weakness may just be temporary. In any case, with the rate cut about to begin, Goldman Sachs believes the Fed is likely to end the rate cut cycle by the first half of 2026. This article was reprinted from "Wall Street View" written by Dong Jing, and edited by Xu Wenqiang.