Goldman Sachs, a prominent financial institution, has issued a warning that the markets may be overly optimistic about the pace at which inflation will cool down. In a note released on Friday, the bank’s strategists, led by chief interest rates strategist Praveen Korapaty, highlighted that the projected decline in U.S. inflation is expected to be slower than what is currently being priced in by the markets.
According to Bloomberg, the Goldman strategists pointed out that investors might be assuming that a sharp deceleration in economic growth would result in a more rapid reduction in inflation. Additionally, they suggested that market participants could be more pessimistic about energy prices compared to what is implied by commodity futures.
However, the strategists argued that these factors would have only a limited impact on inflation. They further emphasized that the markets are disregarding the potential for “delayed-onset inflation” in sectors such as healthcare. In their note, they stated:
“While we anticipate further declines in inflation in the future, markets appear to be significantly more optimistic than we are regarding the pace of cooling.”
In response to the recent decline in inflation, the Federal Reserve decided to pause its series of interest rate hikes at the Federal Open Market Committee (FOMC) meeting held last week.
The decision came after the U.S. Bureau of Labor Statistics (BLS) reported that inflation had moderated from 4.9% to 4% in May, marking the smallest 12-month increase since March 2021. However, it is important to note that core inflation remains elevated at 5.3%.
While many individuals are anticipating that the Federal Reserve will soon begin cutting interest rates, Fed Chair Jerome Powell indicated at a press conference on Wednesday that any rate cuts would be contingent upon a substantial and sustained decline in inflation. Powell stated, “It will be appropriate to cut rates at a time when inflation is coming down really significantly, we’re talking about a couple years out.”
Goldman Sachs’ warning suggests that the market’s expectation of a rapid decline in inflation may not align with the bank’s outlook. The strategists believe that while inflation will continue to decrease, it will do so at a slower pace than what is currently being priced in.
They caution against the market’s excessive optimism, particularly in terms of the potential impact of economic growth slowdown and energy prices on inflation. Furthermore, they highlight the possibility of delayed-onset inflation in sectors like healthcare, which the markets appear to be neglecting.
As the Federal Reserve monitors the inflation trajectory and evaluates the appropriate timing for interest rate adjustments, it is essential for investors and market participants to consider the possibility that inflation may cool down at a slower rate than initially anticipated.
Goldman Sachs’ insight serves as a reminder to approach the market’s optimism about inflation with caution and to closely monitor economic indicators and policy decisions in the coming months.