Jobs Report Means Fed Won’t Cut Until 2024, Goldman Sachs Economist Says

  • Friday’s jobs report showed the US economy added 517,000 payrolls last month, more than twice the number predicted by analysts.
  • That boom gives the Federal Reserve more scope to hike and hold interest rates high, according to Goldman Sachs’ chief economist.
  • “We do expect the Fed to do more than what markets are pricing,” Jan Hatzius said.

The surprise January surge in US jobs could be bad news for investors – because it’s likely to embolden the Federal Reserve to press ahead with its interest-rate hikes as it battles to bring inflation down to 2%, according to Goldman Sachs’ chief economist.

Jan Hatzius said Friday that he expects the central bank to raise benchmark rates above 5% this year and then hold them at that level until 2024 after the latest labor market report showed the US added a better-than-expected 517,000 payrolls last month.

But the market has a different view – with the majority of traders forecasting that the Fed will have started cutting borrowing costs by the end of 2023, according to CME Group’s Fedwatch tool.

“We do expect the Fed to do more than what markets are pricing,” Hatzius told CNBC’s “Squawk on the Street” Friday. “We think we’ll get another couple of hikes that take you to the low-5s rather than the high-4s, which is current market pricing. “

“And then more importantly, we don’t expect cuts in the funds rate until well into 2024 in our baseline forecast,” he added.

The Fed’s dual mandate calls for it to focus on keeping inflation and unemployment levels low, so a strong labor market gives it more scope to carry on raising the cost of borrowing as part of its efforts to tame price pressures.

Inflation has fallen for six months in a row but was still high at 6.5% as of December, compared with the Fed’s 2% target.

“The economy is still quite strong, the labor market is certainly still very strong, and while inflation is coming down, even if we get to 3% by the end of this year and maybe to 2.5% by 2024, that’s still above the target,” Hatzius said.

“So unless there’s a much steeper decline in inflation than in our forecast, you’re probably comfortable with that if you’re the [Federal Open Market Committee].”

Rising interest rates tend to be bearish for stocks because a higher cost of borrowing lowers the future corporate cash flows that form part of their valuations.

Equities have started the year with a significant rally fueled by investor expectations of future rate cuts, with the benchmark S&P 500 index climbing 7.7% and the tech-heavy Nasdaq Composite jumping 14.7% in 2023.

But many top strategists have warned that the market is likely underestimating the Fed’s willingness to keep rates high for the whole of 2023 after tightening by around 450 basis points last year.

BlackRock’s Karim Chedid told Insider last month that investors can no longer rely on the old investing playbook that would expect for the Fed to pivot later in 2023, while top economist Mohamed El-Erian has repeatedly warned of potential headwinds that could disrupt the breathless rally.

Read more: There’ll be a reckoning for investors who don’t adjust to a brand new investment playbook, says BlackRock iShares strategist

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