Goldman Sachs' chief economist Jan Hatzius has countered recent market speculation, asserting that despite the notably hawkish tone struck by Fed Chair Kevin Warsh last Friday in Jackson Hole, the central bank is still projected to hold interest rates steady at its September meeting.

Hatzius acknowledged that Warsh's remarks have effectively opened the door for a potential September hike, but he emphasized that concrete action would only be justified if August CPI and PPI data deliver an upside surprise. Goldman's own projections suggest core CPI and core PCE will both rise by roughly 0.2% month-over-month, a pace that aligns closely with recent inflationary trends and falls short of the threshold needed to trigger policy tightening.

Hawkish Tone Fails to Meet the Bar for Immediate Action

In a client note, Hatzius characterized Warsh's Jackson Hole symposium address as the most hawkish statement since assuming the role of Fed Chair. Warsh explicitly underscored that the Fed's primary objective is ensuring underlying inflation returns to the 2% target at a clear and sufficiently rapid pace, warning that otherwise "there is still work to be done." While acknowledging that this summer's PCE and CPI readings have exceeded expectations, he noted these figures do not yet reveal a meaningful improvement in the underlying inflation trend, with price increases for certain goods and services still significantly outpacing pre-pandemic levels.

Hatzius believes this framework theoretically opens the door for a September rate increase, but the conditions for action are stringent: only an unexpected surge in August CPI and PPI data would support a policy response. Goldman Sachs' internal forecast sees core CPI and core PCE rising approximately 0.2% month-over-month, broadly consistent with recent trend inflation, meaning the bar for a hike has not actually been reached in the near term.

Although market-based probabilities of a hike jumped following the speech, Hatzius reminded investors that Warsh provided no explicit forward guidance, leaving policy highly dependent on subsequent data validation.

Goldman Sees Mild August Inflation, Keeping September Hold as Baseline

Based on its cautious inflation outlook for August, Goldman Sachs continues to treat a rate hold at the September FOMC meeting as its baseline scenario. The firm projects both core CPI and core PCE to rise around 0.2% month-over-month, a pace matching recent inflation trends and insufficient to meet the hike trigger implied by Warsh's warning about the lack of meaningful improvement in underlying inflation.

Hatzius pointed out that if actual data aligns with this moderate expectation, the market's rapid repricing of rate-hike odds following Warsh's hawkish remarks may prove premature. Compared with the speech itself, the upcoming August CPI and PPI reports will be far more critical inputs for the September decision.

Goldman Sachs emphasized that although Warsh signaled firmness and reiterated unwavering commitment to the 2% target, he did not lock in a specific policy path. A comprehensive assessment of financial conditions and labor market dynamics will ultimately determine the final course of action. If inflation remains benign, the Fed is more likely to remain in wait-and-see mode rather than rushing to tighten, thereby avoiding unnecessary shocks to the economy from premature policy restraint.

Dollar Index: A Battle Between Policy Expectations and Data Reality

Goldman Sachs' maintained view of a September hold stands in subtle contrast to the market's rapid escalation of rate-hike expectations following Warsh's hawkish speech. On one hand, market-implied odds of a September hike climbed to roughly 60% after the remarks, providing short-term support for the U.S. dollar, with the dollar index holding near 99.00 last Friday. On the other hand, should Goldman Sachs' assessment prove correct, with August CPI and PPI coming in moderate (core CPI and core PCE around 0.2%), those odds could unwind, potentially dragging the dollar index back toward 98.50.

The analysis from Goldman Sachs implies that Warsh's hawkish rhetoric alone is insufficient to push the Fed toward a September hike; the actual decision will heavily depend on inflation data due over the next two weeks. This suggests the dollar index may remain range-bound with clear upper and lower limits heading into the September meeting, capped by institutional judgments regarding the hiking threshold and supported by the policy expectation cushion provided by Warsh's hawkish delivery.

Furthermore, if August inflation data proves mild, Treasury yields could give back some recent gains, eroding the dollar's yield advantage. Conversely, an upside surprise would validate Warsh's hawkish framework and boost hike probabilities, potentially driving the dollar index toward 99.50-99.80. The August CPI and PPI reports, rather than Warsh's speech itself, will serve as the critical catalyst for the dollar's near-term direction. Ahead of the data release, the dollar index is expected to consolidate around the 99.50 level. As of 9:46 Beijing time on August 31, the dollar index stood at 99.56.