Wall Street Executives Express Doubts About the Federal Reserve’s Easing Strategy

In Riyadh, Saudi Arabia, top executives from leading Wall Street firms are voicing concerns about ongoing inflation in the U.S. economy. They doubt that the Federal Reserve will adhere to its plan for two further interest rate cuts within this year.

In September, the Fed lowered interest rates by 50 basis points, signaling a shift in its approach to managing the U.S. economy and inflation forecasts. A report from JPMorgan and Fitch Ratings late last month projected two additional rate cuts by the end of 2024, with expectations for these cuts to continue into 2025.

According to the CME Group’s FedWatch tool, there’s a staggering 98% probability of a 25 basis point reduction in rates during this week’s meeting in November. There’s also a 78% chance that another 25 basis point cut will occur in December.

However, some CEOs are not convinced. During a discussion at Saudi Arabia’s Future Investment Initiative, they highlighted national economic trends and the proposals from both presidential candidates as factors that could spur inflation. They anticipate further inflationary pressures in the U.S. due to increased spending, a push for domestic manufacturing, and tariffs.

The panel, moderated by CNBC’s Sarah Eisen, included prominent CEOs from Goldman Sachs, Carlyle, Morgan Stanley, Standard Chartered, and State Street, who were asked to indicate whether they believed there would be two more rate cuts by the Fed this year. Not one raised their hand.

“I predict inflation will prove to be more persistent,” stated Jenny Johnson, president of Franklin Templeton. In a subsequent CNBC interview, she expressed her doubt about inflation falling to the targeted 2% level, suggesting instead that only one more rate cut is likely this year.

Reflecting on market sentiments from a year ago, she added, “Were we genuinely discussing a recession then? It seems that topic has vanished.”

Larry Fink, CEO of BlackRock, which manages assets exceeding $10 trillion, also foresees just one potential interest rate cut by the end of 2024, stating, “A 25 basis point cut feels imminent, but we must remember that inflation seems more deeply embedded than ever.”

Moreover, he remarked about the increasingly inflationary policies in place, questioning if anyone considers the associated costs of these economic decisions.

The U.S. Consumer Price Index (CPI), an essential indicator of inflation, reported a 2.4% increase in September compared to the same month in 2023, marking a decline from August’s 2.5%. This September figure represents the slowest annual growth since February 2021.

Recent data also indicated that job creation in the U.S. slowed in October to its lowest rate since late 2020, but market reactions appeared to downplay this concerning trend, even amidst warnings about significant climate and labor shifts affecting the economy.

Goldman Sachs CEO David Solomon opined that inflation is likely to be more ingrained in the global economic landscape than many market analysts currently anticipate, warning of stronger price pressures ahead.

“This doesn’t imply there will be a dramatic upheaval, but it suggests we may face more challenges than the present market predictions, influenced heavily by the policy steps taken,” he stated.

Morgan Stanley’s CEO, Ted Pick, voiced stronger sentiments last Tuesday, asserting the days of lenient monetary policy and zero-interest rates are firmly in the past.

“The era of financial leniency, along with persistently low interest rates and inflation, has concluded. We will see further interest rate rises globally, and we are once again facing geopolitical challenges. These issues will shape the next several decades,” Pick stated, referencing Francis Fukuyama’s well-known 1992 work, The End of History and the Last Man, which discussed the historical implications of ideology conflicts.

During the panel discussion with CNBC’s Eisen, Apollo Global CEO Mark Rowan questioned the reasoning behind the Fed’s decision to cut interest rates amid policies designed for robust economic stimulus. He referenced significant legislative measures like the U.S. Inflation Control Act and the CHIPS and Science Act as indicative of ongoing strength in the U.S. economy.

“We’re discussing various degrees of positivity in the economy. We’ve seen major interest rate hikes, yet here we are at all-time high stock prices and near-zero unemployment. The economy is still thriving, despite all odds,” he noted.

Rowan concluded with, “I honestly question the rationale behind lowering rates unless the goal is to assist the least fortunate within our economy.”