Goldman Sachs’ Chief Economist, Jan Hatzius, renowned for his accurate economic predictions, believes that the era of consumer pain caused by inflation is nearing its end. Hatzius points to a significant drop in the combined core inflation rate of developed markets, suggesting a potential global shift toward disinflation. In his recent note titled “The Great Disinflation,” Hatzius anticipates that major central banks in developed markets will implement “earlier and more aggressive” interest rate cuts in 2024 as inflationary pressures subside.
Global Disinflation Trends:
Goldman Sachs data reveals that the combined core inflation rate in developed markets, which experienced a surge during the pandemic, has fallen to an annualized pace of 2.2% over the past three months and only 1.3% in November. This aligns closely with central banks’ 2% target, leading Hatzius to assert that “Global inflation continues to plummet.”
U.S. Interest Rate Cut Predictions:
In the U.S., where year-over-year inflation dropped to 3.1% in November after peaking above 9% in the summer of 2022, Hatzius forecasts three consecutive 25 basis point interest rate cuts in the first half of 2024. These are likely to occur in March, May, and June, with an additional two cuts expected by year-end. Looking ahead to 2025, he anticipates three more rate cuts, leaving the Fed funds rate between 3.25% and 3.5% by September of that year.
Economic Outlook and Positive Impact on Markets:
Hatzius believes that a robust labor market, lower inflation, and declining interest rates will contribute to GDP growth and boost corporate earnings in the coming year. This, according to Goldman Sachs, will be “exceptionally friendly for risk asset markets.” The positive sentiment is echoed by David Kostin, Goldman’s Chief U.S. Equity Strategist, who raised the S&P 500 price target from 4,700 to 5,100, citing lower inflation, dovish Fed policy, and a more robust economic outlook.
Market Performance and Cryptocurrency Resurgence:
Risk assets, including the S&P 500 and Nasdaq, have experienced significant gains this year, with cryptocurrencies like Bitcoin and Ether also witnessing a resurgence. The positive economic outlook has prompted optimism on Wall Street, with other investment banks revising their price targets and anticipating a favorable environment for stocks in 2024.
Cautionary Notes on Economic Strength:
While Hatzius projects a favorable economic scenario with 2% GDP growth in 2024 and a low unemployment rate of 3.6%, he notes that excessive economic strength could lead to concerns about inflation resurgence. This could result in central banks opting for slower interest rate cuts, balancing the need for economic stimulus with inflationary pressures.
Jan Hatzius’ forecast of a global disinflationary trend and aggressive central bank rate cuts signals potential relief for consumers and a positive outlook for risk asset markets. As investors navigate the evolving economic landscape, Goldman Sachs’ optimism aligns with a broader market sentiment anticipating favorable conditions in 2024. However, the delicate balance between economic strength and inflation concerns underscores the challenges central banks may face in implementing policy measures.