Fed Chair Powell paved the way for a September rate cut at the Jackson Hole central bank symposium, but the key still lies in whether the upcoming non-farm payroll data can provide decisive guidance on the pace and magnitude of rate cuts.

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

This exemplifies the "downside risks to the labor market" that Powell mentioned in the last FOMC press conference and reiterated in his Jackson Hole speech. Goldman Sachs traders believe that if August non-farm payroll growth falls below 100,000, especially in the face of political pressure, it would help cement a September rate cut.

Goldman Sachs points out that if the labor market weakens further, the window of opportunity is right now. The firm believes that whether in an economic slowdown or normalization scenario, the Fed is very likely to complete this rate-cutting cycle before the next Fed Chair takes office, meaning before the first half of 2026 ends.

Employment Data Revisions Raise Concerns

Goldman Sachs notes that future employment growth revisions are more likely to skew negative for several reasons.

First, the birth-death model may be overly optimistic; second, in past economic slowdowns, revisions to preliminary employment data have often been negative; third, ADP data questions the official reports of healthcare sector job growth; and finally, household surveys now overestimate immigration and employment growth.

The firm emphasizes that employment growth prospects are equally dim. Similar to this year's activity growth slowdown, employment growth deceleration appears to stem from more than just direct impacts of trade and immigration policy changes.

Goldman Sachs is particularly concerned that "catch-up hiring" in a few sectors now appears to have ended, with employment growth outside these sectors falling to near-zero levels. The firm states:

"There is enormous uncertainty about the equilibrium pace of job growth, and if the equilibrium level is indeed around 80,000 as estimated by Goldman Sachs Global Investment Research, then the three-month average of 35,000 growth is concerning."

Additionally, the magnitude of July data revisions has also caused Fed concern. The Fed may worry about what happens if an economic slowdown is coming and they react too late. This concern could prompt more aggressive rate-cutting action.

Rate Cut Path Depends on Labor Market Performance

Looking beyond September, the window for employment data to show possibilities of greater deceleration is now.

Goldman Sachs states that markets have passed through the worst tariff uncertainty, and if the next two data releases rebound to higher levels, then current weakness may just be a temporary fluctuation.

Goldman Sachs emphasizes that market attention to August non-farm data is extremely high, and given the scale of previous data revisions, this level of attention is concerning.

The Fed is on track for a September rate cut, after which it will "watch carefully" the U.S. labor market, looking for signs of further sharp weakening to determine whether the subsequent path involves consecutive cuts or gradual normalization.

Rate-Cutting Cycle May Complete by First Half of 2026

Goldman Sachs believes that whether in an economic slowdown or normalization scenario, there's a high probability that the rate-cutting cycle will have ended by the time the next Fed Chair takes office. Powell's term as Fed Chair ends in May next year.

Notably, the U.S. yield curve for June 26/28, 2026 currently shows a flat pattern, providing food for thought about future policy paths.

Goldman Sachs concludes that Powell has given the green light for a September rate cut, but what truly determines the pace of cuts and subsequent trajectory remains the August employment data. Based on multiple concern factors, Goldman Sachs maintains a cautious stance toward the labor market.

If weakness is coming, it will be in the next few data releases; if not, then current weakness may be just a flash in the pan. Regardless, as rate cuts are about to begin, Goldman Sachs believes the Fed is very likely to end the rate-cutting cycle in the first half of 2026.