Goldman Sachs boss David Solomon warns the fight against inflation is nowhere near over – because the US jobs market still looks so strong
- The Federal Reserve's battle against inflation is nowhere near over, according to David Solomon.
- The Goldman Sachs CEO warned that the US's red-hot jobs numbers are making the central bank's task much tougher.
The Federal Reserve's fight against inflation is nowhere near over yet because the US jobs market still looks resilient, Goldman Sachs boss David Solomon has warned.
The bank's CEO used a baseball analogy to describe soaring prices last week, saying that recent red-hot payrolls numbers mean that the central bank is nowhere near the metaphorical ninth inning of its battle to tame soaring prices.
"We're somewhere, in my view, in the middle of the game – not near the end of the game," he said on an episode of the Exchanges at Goldman Sachs podcast published Friday.
"And whether we're in the third inning or the sixth inning, it will depend – but it's very hard to cool off this inflation when you've got such a strong labor market," he added.
The January jobs report showed the economy added 517,000 jobs last month, way clear of the 185,000 that economists polled by Bloomberg had forecast.
Keeping unemployment low is one of the Fed's two main goals – but surging jobs numbers also tend to push up inflation, which is still running at 6.4% against the central bank's 2% target.
That's because a higher employment rate means that more Americans are likely to have the necessary disposable income to afford things that are rising in price, which can then squeeze inflation even higher.
The Fed's main way of fighting inflation is increasing interest rates – and the latest wave of positive economic data means that many traders now expect it to raise borrowing costs to over 5% and then hold them there for the rest of 2023.
But the strong labor market means the central bank will have to be even more aggressive, according to Solomon.
"The market, I think at the moment, thinks the terminal rate is just over 5% – I actually think it's going to be higher than that," he said.
"We're still in an uncertain period," he added. "But we've got very strong employment. The consumer has been very resilient."
Rising interest rates tend to be bad news for stocks because increased borrowing costs chip away at the future cash flows that make up part of their valuations.
Inflation and the Fed have become top-of-mind issues for markets once again this month, with several central bank policymakers pledging to keep rates higher for longer and several surprisingly positive economic data releases testing investors' start-of-year optimism.