Goldman’s David Solomon predicts Fed won’t make emergency rate cuts

Goldman Sachs CEO David Solomon said the Federal Reserve won’t make emergency rate cuts before the central bankers meet in September, despite Monday’s Wall Street meltdown over heightened risks of a recession.

“I don’t expect that you’ll see anything before September,” Solomon said in an interview for Bloomberg’s “The David Rubenstein Show: Peer to Peer Conversations.” 

“The economy will chug along and we probably won’t see a recession,” he said.

Some noted economists had called on Fed Chair Jerome Powell to immediately slash decades-high interest rates after the Dow nosedived more than 1,000 points Monday. Jeremy Siegel, professor emeritus of finance at the prestigious Wharton School of the University of Pennsylvania, urged a 75 basis-points cut to the current rate, which is between 5.25% and 5.50%.

Monday’s sell-off followed Friday’s weak July jobs report and the Fed’s decision to keep rates unchanged last Wednesday. Powell signaled that cuts could be “on the table” for September after their two-day meeting.

Solomon bolstered expectations that the Fed might issue a half-point cut. 

“Based on the economic data we’re seeing now and the messaging from the Fed, I think it’s likely that we’ll see a cut or two in the fall,” he said.

Last week, Goldman Sachs raised its odds of a recession from 15% to 25%. 

Solomon said the stock market will continue to remain volatile as investors adjust to new economic insight. 

“I do think that we’re getting a correction here after a very strong run in the markets, and that might be healthy,” he said. “I think we’re going to see more volatility in the short-term here. This was a pretty big, pretty meaningful correction.”

His prediction that Powell won’t act before September was echoed by Claudia Sahm, chief economist at New Century Advisors and creator of the Sahm Rule — which looks at unemployment data as precursor to a recession.

The rule says that first phase of a recession has begun when the three-month moving average of the US unemployment rate is at least half a percentage point higher than the 12-month low.

Friday’s data showed the unemployment rate hit 4.3% in July, putting the three-month average at 4.1%. That compares to the lowest level over the last year which was 3.5%.

“We don’t need an emergency cut, from what we know right now. I don’t think that there’s everything that will make that necessary,” Sahm said during a CNBC interview.

She argued, though, that the Fed needs to “back off” its restrictions and argued for a 50 basis point cut.

“The best case is they start easing gradually, ahead of time. So what I talk about is the risk [of a recession], and I still feel very strongly that this risk is there,” she said.

The Sahm Rule has been highly accurate historically, able to indicate every incoming recession since 1970.

But in a piece for The Economic Times, Sahm argued that her rule “joins a long list of economic tools skewed by the unusual disruptions of the past four and a half years.”

While investors’ doubts shook the stock market over the weekend, Sahm said the economy is not headed toward a recession. 

However, she warned that a recession is possible if the economy continues to weaken without interference. 

“We need to see the labor market stabilize. We need to see growth level out. The weakening is a real problem, particularly if what July showed us holds up, that that pace worsens,” Sahm said.