David Solomon, CEO of Goldman Sachs, pointed out that inflation is not falling as much as expected and predicted that the U.S. benchmark interest rate would not be cut this year.
At a business luncheon held at Boston College on the 22nd (local time), Solomon said, "I am still in the 'zero cuts' camp, meaning no rate cuts," adding, "We are in a stickier inflation situation." He explained that despite cumulative tightening, inflation is not easing as quickly as expected, making a prolonged high-interest-rate environment inevitable.
This statement came shortly after the release of the minutes from the May Federal Open Market Committee (FOMC) meeting, which highlighted concerns about a rebound in inflation. The minutes confirmed that inflation in the U.S. has not shown progress in slowing down over recent months, and Federal Reserve officials believe it will take longer than initially expected to gain confidence in cutting rates.
In particular, Solomon's zero cuts remark is much more hawkish (favoring monetary tightening) than the market's expectation, which anticipates the first rate cut as early as September. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in about a 60% chance that the Fed will cut rates by at least 0.25 percentage points at the September FOMC meeting. The market expects at least one or two rate cuts this year. The recently released April core Consumer Price Index (CPI) also came in below expectations, rekindling hopes for rate cuts.
Solomon noted that while the fundamentals of the U.S. economy are quite strong, not all Americans are experiencing growth and the effects of inflation equally. He also said, "Inflation is not nominal but cumulative," and shared that conversations with grocery chain executives confirmed that customers are reducing purchases in response to inflation-driven price increases. He added, "We have started to see typical Americans (excluding low-income groups) cut back and change their consumption habits."
However, Solomon predicted that unlike the U.S., Europe, where concerns about economic slowdown are greater, will cut rates within the year. The market currently expects the European Central Bank (ECB) to lower rates as early as June.
He also pointed out concerns that could act as headwinds to the global economy, such as inflationary pressures and geopolitical risks. Solomon assessed that "geopolitical vulnerabilities are something we will have to live with for the foreseeable future." Regarding U.S. industrial policy, he called for a broader approach, highlighting issues such as the construction of electric vehicle charging networks and the additional burden on the power grid due to the adoption of artificial intelligence (AI) technologies.
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