Blind Economist Disagrees with Goldman Sachs' Predictions: Says Federal Reserve Policies May Not Cease Interest Rate Hikes
Michael Anthony Francis
Economic Advisor to The Five Diamond Group in Las Vegas The Blind Economist
Goldman Sachs recently wrapped up their summer macroeconomist field and reported encouraging growth in the market. The financial powerhouse also saw inflation getting tamed. However, they found themselves somewhat disappointed with Jerome Powell's speech at the Jackson Hole economic symposium. Convinced by the summer's successes, Goldman Sachs indicates that the Federal Reserve is either done with raising interest rates or very close to doing so.
As The Blind Economist, my reading of this scenario differs. I contend that the primary focus of the Federal Reserve, as ever, is the core PCE: Personal Consumption Expense. With the last reported figures scaling up from 4.1% to 4.2%, it seems to me that the Federal Reserve will continue to harbor a slightly hawkish stance on its fiscal policies. I don't foresee an end to the rate hikes nor are they even close. Unless we witness a more significant drop in core PCE numbers, the Federal Reserve could potentially increase rates twice more this year - a minimum of once more this year with another hike during Q1 of 2024.
Goldman Sachs attributes the 10-year treasury note’s increase, now surpassing 4%, solely to a seasonal adjustment in August. Once again, my analysis diverges. Investors, in my view, are flocking to Treasury notes in reaction to perceived vulnerabilities in the stock market. Moreover, the core PC inflation remains very rigid. Although the Federal Reserve's rate hikes have influenced the equities market, resulting in higher yields for bonds and the treasury market, their main objective is maintaining inflation stability without causing extreme disruption to the employment landscape.
Continuing on the recent economic developments, it's noteworthy how well employment is faring. The Federal Reserve, thus, is intensely focused on the inflation numbers, showing no signs of relenting in their vigilant efforts.?
Goldman Sachs asserts that the so-called neutral interest rate has gained momentum. They further uphold that the greater treasury supply is a crucial contributing factor. This event, primarily stemmed from the debt ceiling crisis, compelled the federal government to issue more Treasuries. For these reasons, the hike in the 10-year treasury bond is justified, according to Goldman Sachs.
However, as The Blind Economist, I'd like to propose a dissenting thought. It appears that Goldman Sachs might be glossing over an essential point - the equity market isn't exhibiting as much vigor as they'd like to believe. Investors are veering towards fixed-income assets like bonds and Treasuries, emphasizing a greater affinity towards lower-risk avenues. Given the higher yields now offered, the fixation towards the equity market seems to be dwindling.
Goldman Sachs concedes the inevitability of higher Federal Reserve rates ruling the roost for an extended period into what could be an unforeseeable future. We find our perspectives converging on this topic.
They also envisage a steeper inversion of the yield curve. The peculiar increase in government debt, a consequence of issuing new Treasuries to counterbalance the expanded debt ceiling, is worth observing. Intriguingly, corporations are also upping their debt levels despite showcasing robust earnings.
My conviction holds that the Fed will sustain higher rates for an extended median term. It could be that the so-called neutral rate may overshoot market expectations. What has amazed observers is the robust vigor of the United States economy. Equally surprising, though on the opposite end of the spectrum, is the challenging course being navigated by the Chinese economy. The economic balance seems to be in a dynamic phase.
In conclusion, while numerous economists, including Goldman Sachs, are of the view that the labor market is moderating, the reality might not be as stark. Yes, the unemployment rate has inched up from 3.5% to 3.8%, but this is more attributable to an increased participation rate, indicating that more individuals are coming off the bench to re-enter the workforce. This shift can be attributed to consumers at large grappling with inflation, nudging many to abandon their stay-at-home status.?
Currently, the market appears more growth-oriented rather than fixated on inflation, a trend that could potentially lead to a complex scenario. This prevailing market sentiment seems to clash directly with the Federal Reserve's endeavor to reduce core PCE numbers.?
Goldman Sachs projects that by the year's end, the gross domestic product will stand at 3.6%, a forecast that seems reasonable to my analysis. As we navigate the dynamic terrains of the global economy, it's vital to stay informed, adaptive, and strategic.
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I am Michael Anthony Francis, aka The Blind Economist, and CEO of Macroeconomic Solutions. Thanks for joining me in this newsletter. Stay tuned, stay informed, and as always, I'll see you on the flip side.
Michael Francis
The Blind Economist
CEO of Macroeconomic Solutions
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