A trader works as a screen showing the Federal Reserve interest rate announcement, on the floor of the New York Stock Exchange on June 12, 2024.
Brendan McDiarmid | Reuters
RIYADH, Saudi Arabia – Top Wall Street executives see persistent inflationary pressures in the U.S. economy, and they are unconvinced that the Federal Reserve will continue its course of easing interest rates with two additional cuts this year.
The Federal Reserve cut interest rates by 50 basis points in September, signaling a turning point in its management of the US economy and its inflation expectations. In reports issued in late September, strategists at JP Morgan and Fitch Ratings expected two additional interest rate cuts by the end of 2024, and expect these cuts to continue through 2025.
CME Group's FedWatch tool puts the probability of a 25 basis point cut at this week's November meeting at 98%. The current probability of another 25 basis point rate cut at the December meeting is 78%.
But it seems that some CEOs are skeptical. Speaking last week at Saudi Arabia's prominent economic conference, the Future Investment Initiative, they saw more inflation on the horizon for the United States, as the country's economic activity and the policies of the presidential candidates involve potentially inflationary and stimulative developments — such as general government. Spending, manufacturing and customs definitions.
A group of CEOs who spoke on a FII panel moderated by CNBC's Sarah Eisen — which included such dominant Wall Street firms as the heads of Goldman Sachs, Carlyle, Morgan Stanley, Standard Chartered and State Street — were asked to raise their hands if They thought there were two more companies. Interest rate cuts will be implemented by the Federal Reserve this year.
No one raised his hand.
“I think inflation is more stable, frankly, when you look at the kind of jobs report and wage reports in the United States, I think it will be difficult for inflation to get down to the 2% level,” said Jenny Johnson, president of Franklin Templeton. The CEO told CNBC in an interview on Wednesday, saying she believes the interest rate will be cut just once this year.
“Remember a year ago, we were all here talking about a recession? Will there be (one)? No one talks about a recession anymore,” she said.
Larry Fink, whose massive BlackRock fund oversees more than $10 trillion in assets, also expects one rate cut before the end of 2024.
“I think it's fair to say we'll get at least a 25 basis point cut, but even so, I think we have inflation entrenched in the world that is greater than we've ever seen,” Fink said. He said this at another FII committee last week.
“We have a much more inflationary government and politics. Immigration — our policies of repatriating labor, all of that — no one asks the question ‘at what cost?’ Historically, we have been, I would say, a much more consumer-driven economy, and cheaper products have been the better and more progress in political maneuvering.
The US Consumer Price Index, a key measure of inflation, rose 2.4% in September compared to the same period in 2023, according to the US Bureau of Labor Statistics. This figure represents a slight decline from August's reading of 2.5%, implying a slowdown in price growth. The September reading was also the smallest annual reading since February 2021.
New data on Friday showed that US job creation in October slowed to its weakest pace since late 2020. Markets largely shrugged off the bad news, with the nonfarm payrolls report pointing to severe climate and employment disruptions.
Inflation will be more embedded in the global economy than market participants currently expect, Goldman Sachs CEO David Solomon said, meaning price rises could be more persistent than consensus.
“That doesn't mean it's going to rear its head in a particularly ugly way, but I think there's a possibility, depending on what policy actions are taken, that it could be more of a headwind than the current market consensus.” He said.
Ted Beck, CEO of Morgan Stanley, went further, declaring last Tuesday that the days of easy money and zero interest rates were a thing of the past.
“The end of financial repression, zero interest rates and zero inflation, that era is over. Interest rates will be higher, and will be challenged around the world. And the end of the ‘end of history’ – geopolitics is back and will be.” “Conflicts between nations and ideologies are part of the challenge for decades to come,” Beck said, referring to Francis Fukuyama’s famous 1992 book “The End of History and the Last Man,” which argued that conflicts between nations and ideologies were becoming a thing of the past with the end of the era. cold war.
Speaking before the Eisen panel on Tuesday, Mark Rowan, CEO of Apollo Global, questioned why the Fed was cutting interest rates at a time when so much fiscal stimulus was supporting an apparently healthy U.S. economy. He pointed to the American Inflation Act, the CHIPS Act, science, and increased defense production.
“We're all talking, in the United States, about good shades. We're really talking about good shades. And going back to your point about interest rates, we've increased interest rates dramatically, and yet, (the stock market) is) at a record level, no There is unemployment, the capital market is issued at will, and we stimulate the economy?” He said.
He later added: “I'm trying to remember why we cut rates, other than to try to equalize the bottom quartile.”
