A trader acts as a screen displaying the Fed's interest rate announcement on the floor of the New York Stock Exchange on June 12, 2024.
Brendan McDermid | Reuters
RIYADH, Saudi Arabia – Major Wall Street CEOs see persistent inflationary pressures in the U.S. economy and are not convinced the Federal Reserve will continue its rate-cutting path with two more rate cuts this year.
The Fed cut its key interest 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 JPMorgan and Fitch Ratings predicted two more rate cuts by the end of 2024 and expect those cuts to continue through 2025.
CME Group's FedWatch tool puts the probability of a 25 basis point rate cut at this week's November meeting at 98%. The current probability that the key interest rate will be cut by another 25 basis points at the December meeting is 78%.
But some CEOs seem skeptical. Speaking at Saudi Arabia's flagship economic conference, the Future Investment Initiative, last week, they saw more inflation on the horizon for the U.S. as the country's economic activity and the policies of both presidential candidates bring developments that have the potential to be inflationary and stimulative – such as public spending, the relocation of production 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 bosses of Goldman Sachs, Carlyle, Morgan Stanley, Standard Chartered and State Street – were asked to give their Raise your hand if two more suspected interest rate cuts would be implemented by the Fed this year.
Nobody raised their hand.
“I think inflation is more persistent. “Frankly, if you look at the nature of the employment and wage reports in the U.S., I think it will be difficult to get inflation down to the 2% level,” said Jenny Johnson, Franklin Templeton President and CEO, said CNBC in an interview on Wednesday, saying she believes there will only be one more rate cut this year.
“Remember a year ago we were all talking about a recession here? Would there be?” [one]? “Nobody is talking about a recession anymore,” she said.
Larry Fink, whose massive BlackRock fund manages over $10 trillion in assets, also expects a rate cut before the end of 2024.
“I think it's fair to say we'll have at least 25 [basis-point cut]”But even so, I think we have more embedded inflation globally than ever before,” Fink said at another FII panel last week.
“We have a government and policies that are much more inflationary. Immigration – our onshoring policies, all of that – no one asks the question at what cost.” “Historically, I would say, we were a more consumer-oriented economy, the cheapest products were the best and most progressive kind of politics,” he remarked.
According to the US Bureau of Labor Statistics, the US Consumer Price Index, a key indicator of inflation, rose 2.4% in September compared to the same period in 2023. This figure is slightly lower than August's 2.5%, which suggests a slowdown in price growth. The September value was also the smallest annual value since February 2021.
On Friday, new data showed that U.S. job creation slowed to its weakest pace since late 2020 in October. Markets largely ignored the bad news as the non-farm payrolls report pointed to acute climate and labor disruptions.
Goldman Sachs CEO David Solomon said inflation will be more entrenched in the global economy than market participants are currently predicting, meaning price increases could prove more stubborn than consensus.
“That doesn't mean it's going to develop in a particularly ugly way, but I think there's a possibility that, depending on the policy actions taken, it could represent a stronger headwind than the current market consensus,” he said.
Morgan Stanley CEO Ted Pick went even further, declaring last Tuesday that the days of easy money and zero interest rates are finally 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, 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 the coming decades,” Pick said, referring to Francis' famous book “The End of History and the Last Man.” Fukuyama in 1992, which argued that conflicts between nations and ideologies are becoming a thing of the past with the end of the Cold War.
At Eisen's panel on Tuesday, Apollo Global CEO Marc Rowan even questioned why the Fed was cutting interest rates at a time when so much fiscal stimulus had supported a healthy-looking U.S. economy. He pointed to the U.S. Inflation Reduction Act and the CHIPS and Science Act, as well as an increase in defense production.
“In the US we all talk about degrees of good. We're really talking about degrees of good. And to get back to your point about the tariffs: We have massively increased the tariffs, and yet [the] Stock exchange [is] at a record high, no unemployment, capital market issuance at will, and we stimulate the economy?” he said.
“I'm trying to remember why we're cutting rates other than to try to equalize the bottom quartile,” he later added.
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