This week, Powell confirmed the consensus of most people on Wall Street that US inflation is still too high, and it is not yet time to cut interest rates. On Tuesday local time, Powell said that since inflation is not low enough and will not last long enough, it is too early to consider cutting interest rates.
Powell emphasized, “Given the strong performance of the labor market and our progress (slow) on the issue of inflation, it is appropriate to continue to maintain the role of restrictive policies at this stage, and let data and evolving prospects guide us.”
Although the US economy has shown resilience in an environment of high interest rates, economists and analysts have begun to question whether the US economy can achieve a soft landing due to stubborn inflation. Perhaps the unemployment rate will have to rise before inflation falls back to the 2% target set by the Federal Reserve.
However, Goldman Sachs doesn't see it that way. Despite pessimism caused by March's inflation data, the bank insisted on predicting a soft landing. Goldman Sachs chief economist Jan Hatzius (Jan Hatzius) pointed out in the analysis report that the March inflation rate was 3.5%, but he believes that this high inflation is mainly due to “an unusually large number of special factors.”
Specifically, the special factors mentioned by Hazus include the “January effect,” that is, stock prices tend to rise more in January than in other months, and rents seem to be about to soar due to brief fluctuations in the rental market. Both of these phenomena later proved to be temporary. Hazus wrote, “As special factors subside, we expect subsequent inflation to slow again.”
More importantly, Goldman Sachs has found no signs of large-scale layoffs in the US, and large-scale layoffs usually serve as a warning sign of a soft landing turning into a hard landing. To support his theory, Hazus pointed out that the number of new jobs added in the US in March far exceeded expectations, reaching 303,000, while economists originally expected only 200,000 new jobs.
Meanwhile, Hazus pointed out that large-scale layoffs “are still relatively moderate,” and cited data from the Ministry of Labor, research firm Challenger, Gray & Christmas, and WARN Notice (a legal document that companies must submit before large-scale layoffs) as a basis.
Hazus has long supported the idea that America is moving towards a soft landing. In an interview in March, he said that the US is “still far from recession” because while US prices are falling, consumer spending has not slowed significantly.
Despite some recent bumps, inflation is generally moving in the right direction, thanks to continued strong US consumer spending and a stable labor market. In 2020, the COVID-19 pandemic impacted the job market, and countless hotel and tourism workers lost their jobs. Subsequently, market demand rebounded, and employers could hardly find enough employees and had to offer very attractive salaries to attract talent.
However, according to Hazus' analysis, the current job market is relatively stable. The unemployment rate has remained below 4% for 26 consecutive months, the longest continuous period since the 1960s. Powell also showed confidence in the labor market, which he said showed “steady growth and continued strength.”
Compared to the post-pandemic period, more employees are choosing to stay in their original positions today. Economists can explore whether this means growing anxiety or whether the situation is finally returning to normal. Although the turnover rate has declined, employers are filling jobs faster than in recent years.
Overall, a less frenetic job market means workers won't find new jobs as easily as they used to be. “Newcomers to the labor market may take longer to find work,” Hazus wrote.
Ultimately, Goldman Sachs expects US inflation to continue to fall, and estimates that the inflation rate will stagnate at around 2.5% by the end of this year. However, to reach the 2% target level that the Federal Reserve is concerned about, we will have to wait until 2025. Wall Street analysts generally expect inflation to continue. For example, according to the February report, J.P. Morgan Chase expects the annual inflation rate to hover around 3%. Even the most worried economists, who adjusted their forecasts after the March inflation data were released, still believe that overall inflation will fall, which means that inflation will fall, but not as fast as expected.
Editor/Jeffrey