Top Wall Street executives become skeptical of Fed easing path

RIYADH, Saudi Arabia — Top Wall Street CEOs see persistent inflationary pressures in the U.S. economy and are not convinced the Federal Reserve will continue its policy of easing rates with two more cuts this year.

The Fed lowered its key rate by 50 basis points in September, marking a turning point in its management of the American economy and in its inflation outlook. In reports from late September, strategists at J.P. Morgan And Fitch Ratings had predicted two additional interest rate reductions by the end of 2024 and expects these reductions to continue through 2025.

The CME Group FedWatch tool estimates a 98% chance of a 25 basis point cut at this week’s November meeting. The current probability that the benchmark rate will be cut by another 25 basis points at the December meeting is 78%.

But some leaders seem skeptical. Speaking last week at Saudi Arabia’s flagship economic conference, the Future Investment Initiative, they see more inflation on the horizon for the United States as the country’s economic activity and policies two presidential candidates involve developments that will be potentially inflationary and stimulative – such as the public economy. spending, relocation of manufacturing industry and customs tariffs.

A group of CEOs speaking at an FII panel moderated by CNBC’s Sara Eisen – which included Wall Street hegemons such as the bosses of Goldman Sachs, Carlyle, Morgan Stanley, Standard Chartered and State Street – were invited to raise their hands if they thought two more rate cuts would be implemented by the Fed this year.

No one raised their hand.

“I think inflation is more stubborn, honestly, if you look at the type of jobs report and the wage reports in the United States, I think it’s going to be difficult for inflation to come down to the 2% level,” Jenny Johnson, president of Franklin Templeton. and CEO, told CNBC in an interview Wednesday, saying she believed only one further interest rate cut would take place this year.

“Remember a year ago we were all here talking about a recession? Would there be (one)? Nobody talks about a recession anymore,” she said.

Larry Fink, whose mammoth BlackRock fund oversees more than $10 trillion in assets, also expects a rate cut before the end of 2024.

“I think it’s fair to say we’re going to have a reduction of at least 25 (basis points), but that being said, I believe we have more embedded inflation around the world than ever before,” he said. Fink said. said during another FII panel last week.

“We have a much more inflationary government and policy. Immigration – our relocation policies, all of that – no one is asking the question ‘at what cost’. Historically, we were, I would say, a more inflation-oriented economy. consumption, the cheapest products were the best and most progressive way to do politics,” he noted.

America consumer price indexA key inflation gaugewas up 2.4% in September compared to the same period in 2023, according to the U.S. Bureau of Labor Statistics. This figure is down slightly from August’s figure of 2.5%, implying a slowdown in price growth. The September figure was also the lowest annual figure since February 2021.

On Friday, new data showed U.S. job creation slowed in October at its weakest pace since late 2020. Markets largely ignored the bad news as the nonfarm payrolls report flagged severe weather and labor disruptions.

Goldman Sachs CEO David Solomon said inflation will be more entrenched in the global economy than market participants currently predict, meaning price increases could prove more persistent than consensus .

“This is not to say that the situation is going to manifest itself in a particularly ugly way, but I think it is possible, depending on the policy measures taken, that this could be a bigger obstacle than the current market consensus” , he added. he said.

Morgan Stanley CEO Ted Pick went even further, declaring last Tuesday that the days of easy money and zero interest rates were definitely over.

“The end of financial repression, zero interest rates and zero inflation, those days are over. Interest rates will be higher and will be contested around the world. And the end of the “end of history” – geopolitics is back and will be part of the challenge for decades to come,” Pick said, referring to Francis Fukuyama’s famous 1992 book, “The End of History and the Last Man,” which asserted that conflicts between nations and ideologies were a thing of the past with the end of history.

Speaking on Sara Eisen’s panel on Tuesday, Apollo Global CEO Marc Rowan even questioned why the Fed was cutting rates at a time when so much fiscal stimulus had supported a seemingly healthy U.S. economy. He highlighted the U.S. Inflation Reduction Act and the CHIPS and Science Act as well as an increase in defense production.

“We’re all talking, in the United States, about shades of good. We’re really talking about shades of good. And to your point about rates, we’ve raised rates massively, and yet, (the) stock market (is ) at a record level, no unemployment, capital market emissions at will, and we stimulate the economy?” he said.

“I’m trying to remember why we’re cutting rates, other than to try to even out the bottom quartile,” he later added.