Top Wall Street executives skeptical about Fed’s easing path

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

The Federal Reserve cut its benchmark rate by 50 basis points in September, signaling a turning point in its management of the U.S. economy and its inflation outlook. In late September reports, strategists at JP Morgan and Fitch Ratings had forecast two additional interest rate cuts by the end of 2024 and expect those reductions 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 that the reference rate will drop another 25 basis points at the December meeting is 78%.

But some CEOs are skeptical. Speaking last week at Saudi Arabia’s main economic conference, the Future Investment Initiative, they see more inflation on the horizon for the US, as the nation’s economic activity and the policies of both presidential candidates involve developments that They will be potentially inflationary and stimulative, such as public spending, manufacturing relocation and tariffs.

A group of CEOs speaking on an FII panel moderated by CNBC’s Sara Eisen, which included Wall Street hegemons such as the heads of Goldman Sachs, Carlyle, Morgan Stanley, Standard Chartered and State Street, were asked to Raise your hand if you thought two more people The Federal Reserve would cut rates this year.

Nobody raised their hand.

“I think inflation is stiffer, honestly, if you look at the kind of employment report and wage reports in the US, I think it’s going to be difficult for inflation to get down to the 2% level,” said Jenny Johnson , president of Franklin Templeton. and CEO, told CNBC in an interview on Wednesday, saying he believes there will only be one more interest rate cut this year.

“Remember how a year ago we were all here talking about recession? Was there going to be [one]? “Nobody talks about recession anymore,” he said.

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

“I think it’s fair to say we’re going to have at least 25 [basis-point cut]But, having said that, I think we have more inflation built into the world than we’ve ever seen,” Fink said at another FII panel last week.

“We have a government and policies that are much more inflationary. Immigration, our relocation policies, all of this, no one asks ‘at what cost’. Historically we were, I would say, a more consumption-driven economy, the products more cheap were the best and most progressive way to politick,” he said.

The US consumer price index, a key indicator of inflation, rose 2.4% in September compared to the same period in 2023, according to the US Bureau of Labor Statistics. That figure is slightly less than the 2.5% in August, implying a slowdown in price growth. September’s reading was also the lowest annual since February 2021.

On Friday, new data showed that U.S. job creation in October slowed to its weakest pace since late 2020. Markets largely ignored the bad news as the nonfarm payrolls report signaled serious climate shocks. and labor.

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 stiffer than consensus.

“That doesn’t mean it’s going to emerge in a particularly unpleasant way, but I do think there’s a chance, depending on the political actions that are taken, that it could be a bigger headwind than the current market consensus.” said.

Morgan Stanley CEO Ted Pick went even further, declaring last Tuesday that the days of easy money and zero interest rates are firmly behind us.

“The end of financial repression, of zero interest rates and zero inflation, that era is over. Interest rates will be higher, they will be challenged 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, referencing Francis Fukuyama’s famous 1992 book, “The End of History and the Last Man,” which argued that conflicts between nations and ideologies They were a thing of the past with the end of the Cold War.

Speaking on Sara Eisen’s panel on Tuesday, Marc Rowan, CEO of Apollo Global, even questioned why the Federal Reserve was cutting rates at a time when so much fiscal stimulus had propped up a healthy-looking U.S. economy. He highlighted the American Inflation Reduction Act and the CHIPS and Science Act and an increase in defense production.

“We’re all talking, in America, about shades of good. We really are talking about shades of good. And going back to your point about rates, we raised rates enormously and yet [the] stock market [is] at a record level, without unemployment, issuance of capital at will and we are stimulating the economy?” he stated.

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