The slowdown in inflation would likely lead to more dovish monetary policy in the future. In addition, economic activity has continued to hold up, despite significantly higher borrowing costs since the Fed launched its rate hike campaign in early 2022.
“We expect some slowdown in the next two quarters, mainly due to the sequential slowdown in real personal disposable income growth (…) and the drag from the reduction in bank loans,” Hatzius said.
However, he expects the economy to continue growing, albeit at a slower than trend rate. As for the current inversion of the Treasury yield curve, generally seen as a harbinger of a coming recession, Hatzius said it both reflected and validated “overly pessimistic” economic forecasts.
An inverted yield curve usually indicates expectations that the Fed will lower rates to stimulate the economy.
The Goldman Sachs expert said, however, that there is a “plausible path” for the Federal Reserve to cut interest rates just because inflation falls. Hatzius added that the US central bank will most likely raise rates another 25 basis points at its policy meeting next week, in what he expects to be the last hike in the current tightening cycle.