FameEX Hot Topics | Goldman Sachs: Excessive Market Optimism Regarding Inflation's Subsiding

According to strategists at Goldman Sachs, the markets appear to be overly optimistic about the pace at which inflation will recede. Despite projecting further decreases in inflation, the strategists caution that the markets are much more hopeful about the rate of cooling. In a note issued on Friday, led by chief interest rates strategist Praveen Korapaty, Goldman Sachs' team emphasized that inflation in the United States is expected to decrease at a slower pace than what is currently being priced by market participants, as reported by Bloomberg.

The strategists elaborated on the reasons behind the disparity between their outlook and the market sentiment. Investors might be assuming that a sharp slowdown in economic growth would lead to a rapid decline in inflation. Additionally, they may hold a more bearish stance on energy prices compared to what is implied by commodity futures. However, the Goldman Sachs team argued that these factors will only have a limited impact on inflation. They stressed that markets are also overlooking the potential for "delayed-onset inflation" in sectors such as healthcare.

The note from Goldman Sachs stated, "Although we expect further declines in inflation going forward, markets appear considerably more optimistic than we are about the pace of cooling."

In recent developments, the Federal Reserve decided to pause its streak of interest rate hikes at the Federal Open Market Committee (FOMC) meeting held last week. This decision came after the U.S. Bureau of Labor Statistics (BLS) reported a cooling in inflation from 4.9% to 4% in May, marking the smallest 12-month increase since March 2021. However, core inflation remains elevated at 5.3%.

While many anticipate that the Federal Reserve will begin cutting interest rates in the near future, Fed Chair Jerome Powell emphasized during a press conference that significant rate cuts would only be appropriate when inflation experiences a substantial decline, and this might take a couple of years. Powell stated, "It will be appropriate to cut rates at a time when inflation is coming down really significantly, we're talking about a couple years out."
Goldman Sachs' cautionary note serves as a reminder that market optimism should be balanced with a realistic assessment of the pace at which inflation is expected to subside. As the Federal Reserve keeps a watchful eye on these developments, market participants will need to consider a variety of factors that could impact inflationary trends, including delayed-onset inflation and the potential effects of energy prices on the overall trajectory of inflation.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.