Officials of the Federal Reserve in the United States decided at the end of April and beginning of May that, given the recent months of consistently unsatisfactory inflation data, they would maintain the current interest rate level for a longer period than expected, and even did not rule out further tightening of policies. In addition, Goldman Sachs CEO David Solomon predicts that, considering government spending and investment in artificial intelligence, the US economy is showing resilience and the Fed will not cut interest rates this year.
Waiting for a rate cut may take longer than expected
The Fed is afraid of inflation if they cut rates too early
US stocks continue to reach new highs
Goldman Sachs CEO predicts that the US will not cut interest rates this year
According to journalist Nick Timiraos of The Wall Street Journal, who is known as the “Fed megaphone,” the Federal Reserve in the US reached a conclusion at the meeting on April 30 to May 1 that they need to maintain interest rates at the current level for a longer time than previously expected, following a third consecutive month of disappointing inflation data last month.
According to the meeting minutes, although officials still believe that interest rates are high enough to slow down the economy and inflation, they expressed uncertainty about how much the rates would suppress economic activity and price pressures. Some officials even mentioned that if inflation risks become a reality, they would be willing to further tighten policies, which would be appropriate.
Boston Federal Reserve Bank President Susan Collins said on the 21st that she needs to see more evidence that price pressures are moving towards the central bank’s target of 2% before considering a rate cut, otherwise there may be more restrictive measures.
Timiraos mentioned that although price pressures significantly eased in the second half of last year, allowing Fed leaders to consider starting rate cuts in one or two months of mild inflation, a series of data from the first quarter shows that price pressures in the economy are building up. Unless the labor market unexpectedly weakens, the Federal Reserve will be forced to postpone any deliberation on rate cuts for the next few months.
After the meeting, April’s inflation data showed that price pressures did not intensify again, providing additional comfort to the central bank that there is no need to resume rate hikes. Christopher Waller, a member of the Federal Reserve’s Board of Governors, stated in a speech in Washington on Tuesday that the possibility of rate hikes is currently very low. However, Waller also warned that if policy is relaxed too early, it may stimulate a rise in consumption, investment, and asset prices, which could hinder inflation from falling back to their 2% target. Another risk is that if they wait too long to find evidence that tightening policies are slowing down the labor market, it may force the implementation of more traditional rate cuts, which often coincide with the beginning of an economic downturn.
Waller said on Tuesday, “We don’t see any signs that staying in this state for three to four months would cause a major economic downturn.” This indicates that he believes the current policy state will not have a significant impact on the economy even if it continues for a while longer, and the market will have to wait longer than expected for high interest rates to be maintained, with uncertainty about whether it will happen this year.
On Tuesday, the S&P 500 and Nasdaq indices in the US reached new historical highs at the close, and Federal Reserve officials maintained a cautious attitude, possibly to prevent investment market prices from soaring too high and causing potential asset bubbles.
Goldman Sachs CEO David Solomon stated during an event at Boston College on Wednesday that due to government spending and investment in artificial intelligence infrastructure, the US economy is showing resilience, and he predicts that the Federal Reserve will not cut interest rates this year. Solomon said:
However, Goldman Sachs President John Waldron mentioned at a conference of the Investment Company Institute in Washington that there is greater controversy within the company regarding the pace of rate cuts. Individuals who frequently communicate with clients and CEOs have a more cautious attitude and point out that Goldman Sachs has not formed a unified view.
Finally, Solomon pointed out that considering the weak European economy and structural demographic issues, there is a greater possibility of interest rate cuts by the European Central Bank this year.