The Fed won't cut interest rates and will keep battling inflation through next year and into 2024, says Goldman Sachs' chief US economist
- The Fed won't pivot as it'll keeping fighting inflation till 2024, says a Goldman Sachs economist.
- "I'm not expecting cuts next year," he said, adding he sees a 0.50% rate hike on Wednesday.
The Federal Reserve still has much ground to cover in terms of policy action before it can tame inflation, according to Goldman Sachs's chief US economist.
Speaking to Bloomberg on Wednesday, David Mericle discussed the latest US inflation print and what it suggests about the Fed's next monetary policy moves.
He pushed back against speculation among some market participants that the Fed could do a policy U-turn some time in 2023 to starting lowering interest rates as inflation cools.
"I'm not expecting cuts next year," Mericle said, but added that the Fed will likely slow the pace of tightening after consumer price increases decelerated for a fifth straight month in November.
"We'll see a slowdown of 50 basis points tomorrow at the December meeting, and then we're likely to see, I think, a futher slowdown to 25 basis points most likely at the February meeting," Mericle said.
Inflation cooled again in November, with the annual rate dropping to 7.1% from 7.7% in October and as high as 9.1% in June. The reading came in below the 7.3% level predicted by economists.
The latest price data came in just ahead of the Fed's last meeting of 2022 — investors expect the central bank to announce Wednesday a 50 basis point rate hike, after lifting borrowing costs by 75 basis points at each of the last four meetings.
According to Mericle, the Fed's fight against price pressures will extend through next year and into 2024, as it has a lot more work to do in bringing wage inflation down, specifically. "The Fed still needs to rebalance the labor market, still needs to get wage growth and labor-intensive services inflation back down to target compatible levels," he said.
"That's going to take quite a while, I think we'll make some progress in 2023, but that's probably a story that will extend into 2024 as well," he added.
While Mericle noted the Fed's policy tightening is working well in slowing demand in line with supply, he warned that the central bank should avoid "overdoing it" as that could tip the US economy into a recession. "When you're headed in the right direction, I think it would be a mistake to wind up doing more than you think," he said.