Jerome Powell this week made official what most of Wall Street and the investment community already knew: that inflation was still too high for rate cuts.
On Tuesday, during a public appearance with Bank of Canada governor Tiff Macklem in Washington, D.C., Powell said it was too early for the Federal Reserve to consider rate cuts because inflation hasn’t been low enough, for long enough.
“Right now, given the strength of the labor market and the progress on inflation, it’s appropriate to allow restrictive policy further time to work and let the data and evolving outlook guide us,” Powell said.
Powell’s remarks came after a third straight higher-than-expected inflation report that scuttled many Wall Street predictions of upcoming rate cuts. The economy remains resilient, fighting through the high interest rate environment, but with inflation refusing to budge, economists and analysts started to wonder if the soft landing would happen. Maybe unemployment would have to go up for inflation to come down to the Fed’s 2% target?
Not for Goldman Sachs, though. Despite the pessimism caused by March’s inflation figures, the bank remains steadfast in predicting a soft landing. Inflation in March was 3.5%, but Goldman believes that high rate resulted from “an unusually large number of special factors,” chief economist Jan Hatzius wrote in an analyst note Tuesday.
Specifically, Hatzius was referring to the January effect, a phenomenon where stock prices tend to rise in January more than in any other month, as well as a blip in the home rental market that made it seem as though rents were poised to shoot up. Both of these have since proved to be temporary. “As the special factors unwind, we expect sequential inflation to slow anew,” Hatzius wrote.
More important, though, Goldman doesn’t see signs of imminent layoffs, which would certainly be a red flag that the soft landing was turning into a crash landing. To support his theory, Hatzius points to the number of new jobs the economy added in March and the fact that multiple data sources don’t show rampant layoffs. In short, Goldman is sticking with its soft landing call because it believes stubborn inflation was a several-months-long anomaly and the labor market is showing no signs of precarity.
The latest employment data smashed expectations when it showed the U.S. added 303,000 jobs last month, while economists expected only 200,000. At the same time, Hatzius points out that widespread job cuts “remain muted,” citing data from the Labor Department, the research firm Challenger, Gray & Christmas, and WARN notices, which are legal documents employers must file in the lead-up to a mass layoff.
Hatzius has long supported the view that the U.S. is heading toward a soft landing. In March, he told CNN the U.S. was “nowhere near a recession,” because prices had come down without any meaningful slowdown in spending.
Despite recent bumps, inflation continues heading in the right direction, mostly thanks to continued consumer spending, precisely because the labor market is stabilizing. In 2020, employment went through the shocks of the pandemic, and countless workers in hospitality and travel found themselves out of a job. Then the market overcorrected with employers barely able to find enough employees, forcing them to offer eye-popping salaries to recruit talent.
Now, though, the job market is relatively stable, according to Hatzius’s analysis. Unemployment rate has been below 4% for 26 months, the longest streak since the 1960s. Powell, too, seemed confident in the labor market, saying it had “solid growth and continued strength” on Tuesday.
In contrast with the post-pandemic period, more workers today are staying put. Economists could debate whether that’s a sign that fear is creeping in or that things are finally back to normal. Quit rates are down, but employers are filling more jobs than they have in years. On balance, though, a less frothy job market means workers won’t be able to find a new job as easily as in the past. “New entrants into the workforce may have to search longer before they find a job,” Hatzius wrote.
Ultimately, Goldman does expect inflation to continue to fall, estimating that it will stall out at around 2.5% by the end of the year. However, the economy won’t hit the 2% number the Fed is eyeing until 2025. Across Wall Street, analysts still forecast lingering inflation. JPMorgan, for example, expects it to hover around 3% all year, according to a February report. For the most part, even the most concerned economists who adjusted their forecasts upward after the March inflation data still see it coming down overall. Meaning inflation will drop, just not as fast as hoped.
