REUTERS/Danny Moloshok
- The Federal Reserve’s war against inflation is far from over, according to David Solomon.
- The CEO of Goldman Sachs has warned that the overheated US jobs numbers are making the central bank’s task more difficult.
- “It’s very difficult to cool this inflation when you have a strong labor market,” he said last week.
The Federal Reserve’s fight against inflation is not over as the US job market looks strong, warned Goldman Sachs boss David Solomon.
The bank’s CEO used a baseball analogy to describe rising prices last week, saying the recent red-hot payrolls numbers meant the central bank was nowhere near the metaphorical ninth inning of its battle to take advantage of rising prices.
“We are somewhere, in my view, in the middle of the game – not close to the end of the game,” he said in an episode of the Exchange by Goldman Sachs podcast published on Friday.
“And whether we’re in the third inning or the sixth inning, it depends — but it’s very difficult to cool this inflation when you have a strong labor market,” he added.
The January jobs report showed the economy added 517,000 jobs last month, well ahead of the 185,000 forecast by economists polled by Bloomberg.
Keeping unemployment low is one of the Fed’s two main goals – but rising job numbers are likely to push up inflation, which continues at 6.4% against the central bank’s 2% target.
That’s because a higher employment rate means more Americans are likely to have more disposable income to afford things that are rising in price, which could push inflation even higher.
The Fed’s main way of fighting inflation is to raise interest rates – and the latest wave of positive economic data means many traders now expect borrowing costs to rise by more than 5 % and then keep it there for the rest of 2023.
But the strong labor market means the central bank needs to be more aggressive, according to Solomon.
“The market, I think at the moment, thinks the terminal rate will be more than 5% – actually I think it will be higher than that,” he said.
“We are still in an uncertain time,” he added. “But we have very strong work. The consumer is very strong.”
Rising interest rates tend to be bad news for stocks because rising borrowing costs erode future cash flows that make up their valuations.
Inflation and the Fed have once again been top-of-mind issues for markets this month, with several central bank policymakers vowing to keep rates higher for longer. period and some surprisingly positive economic data released to test the start of the year optimism among investors.
Read more: Michael Burry, BlackRock and Morgan Stanley warned that the rally in stocks will not last. Here’s why they have little confidence in the market’s best start-up in a year since 2019
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