Goldman Sachs CEO David Solomon said the Federal Reserve will not make an emergency interest rate cut before the central bank’s September meeting, despite Monday’s Wall Street sell-off over growing recession risks.
“I don’t think we’ll see anything by September.” Solomon said in an interview on Bloomberg’s “The David Rubenstein Show: Peer-to-Peer Conversations.”
“The economy is going to be OK and we probably won’t have a recession,” he said.
After the Dow Jones Industrial Average plunged more than 1,000 points on Monday, leading economists called on Federal Reserve Chairman Jerome Powell to immediately cut interest rates, which are at their highest in decades. Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania, called for a 75 basis point cut to the current rate of 5.25% to 5.50%.
Monday’s sell-off followed Friday’s weak July jobs report and the Fed’s decision to keep interest rates steady last Wednesday, after Chairman Powell suggested a rate cut could be “on the table” in September after the two-day meeting.
Solomon reinforced his expectation that the Fed could cut interest rates by half a percentage point.
“Based on the economic data that we’re seeing right now and the messaging from the Fed, I think one or two rate cuts in the fall are likely,” he said.
Last week, Goldman Sachs raised the probability of a recession from 15% to 25%.
Solomon said stock markets will remain volatile as investors adjust to the new economic outlook.
“I think we’re seeing a correction after a very strong market move, and that may be healthy,” he said. “I think we’re going to see more volatility in the short term. This has been a pretty big, pretty meaningful correction.”
His prediction that Powell will not act before September was echoed by Claudia Sahm, chief economist at New Century Advisors and creator of the “Sahm Rule,” which views unemployment data as a harbinger of an economic downturn.
According to this rule, the first stage of a recession begins when the three-month moving average of the U.S. unemployment rate is at least 0.5 percentage points higher than its 12-month low.
Data on Friday showed the unemployment rate reached 4.3% in July, bringing the three-month average to 4.1%, lower than last year’s low of 3.5%.
“Based on what we know right now, there is no need for emergency cuts. I don’t believe all the circumstances are in place that would require emergency cuts.” Sam said in an interview with CNBC..
But she argued the Fed needed to “relax” regulation and made the case for a 50 basis point rate cut.
“The best case scenario is to start easing up front and gradually. What I’m talking about is the risk [of a recession]”And I feel very strongly that this risk still exists,” she said.
The Sarm rule has been historically very accurate and has been able to predict every recession since 1970.
but, Economic Times articleSahm argued that his rule “joins a long list of economic policies distorted by the extraordinary turmoil of the past four and a half years.”
Investor doubts rocked the stock market over the weekend, but Sam said the economy was not heading for a recession.
But he warned that if the economy continues to weaken without intervention, it could slip into recession.
“We need stabilisation of the labour market and smoothing of growth. Weakening is a real issue, especially if the pace worsens as shown in July,” Sam said.
