US inflation has peaked, but the labor gap must narrow for the Fed to pull off a soft landing: Goldman Sachs strategist

• US inflation has likely peaked, but a "sticky" labor market gap is an issue, a Goldman Sachs strategist said.
• Job openings are outstripping the number of available workers by two-to-one in the US.

It's likely US inflation will start to cool soon, but an imbalance in the labor market still needs to be fixed for the Federal Reserve to succeed in its goals, according to a top Goldman Sachs strategist.

The gap between labor market demand and supply will need to narrow for the Fed to manage a "soft landing" for the US economy, Tim Moe told Bloomberg TV on Monday.

"Our view is that US inflation has probably peaked and will start to come off," Moe said.

The Wall Street bank's chief Asia-Pacific equity strategist suggested the impact of a surge in oil prices earlier this year is fading, given the falling prices for gas at the pump.

But one persistent factor holding back an easing of inflation is the months-long imbalance in the job market, he added.

"The real sticky bit of inflation is, of course, in the labor market, and that's where there's some progress that's been made. But a lot more that has to be accomplished," Moe said.

Job openings are outstripping the number of workers available by two-to-one, as businesses scramble to rehire after the pandemic but various factors keep Americans from returning to the workforce. High demand for workers is driving up wages, which intensifies inflation pressures.

"One of the issues or the indicators that we look at is the gap between job openings and the labor force," Moe said. "That's coming down. And that's actually the key to a soft landing."

"If the gap comes down and you don't have to have a corresponding significant rise in unemployment, that's kind of the narrow path to a soft landing, which is what our US economists are broadly expecting," the Goldman Sachs strategist added.

The Fed has embarked on a series of big interest rate hikes to try to cool inflation running at 40-year highs, and investors are concerned its aggressive tightening could push the US into economic slowdown, known as a hard landing.

The chances of that have increased as the central bank pushes for a "growth recession" — a period of below-average growth, rising unemployment, and slowing inflation — that likely rules out a soft landing.

Investors are now focused on the August inflation report, due Tuesday, after the last US Consumer Price Index reading showed price rises cooled off in July.

If the reading is lower than expected, that will raise hopes the Fed will tone down its aggressive monetary policy and so likely spur a rise in stocks. But a rally could pose problems for the central bank.

"The key point to make here is that if the market gets happy about an optically better inflation print and starts to rally, that's going to mean that financial conditions ease — which means the burden on the Fed remains that much more significant," Moe said.