Jan Hatzius, chief economist at Goldman Sachs, believes the era of pain for consumers is coming to an end. Photographer: Christopher Goodney/Bloomberg via Getty Images
Inflation has been a thorn in the side of central banks around the world for over two years, but Jan Hatzius, chief economist at Goldman Sachs, believes the era of pain for consumers is coming to an end. And Hatzius is someone worth listening to given his recent track record in business.
The combined core inflation rate of developed markets, which faced a spike in inflation during the pandemic, fell to an annual rate of just 2.2% in the last three months and fell to just 1.3% in November, according to Goldman Sachs data. This roughly corresponds to the central banks' 2% target. For Hatzius it means one thing: “Global inflation continues to fall.”
Hatzius wrote in a note titled “The Great Disinflation” on Monday that several major central banks in developed markets will cut interest rates “earlier and more aggressively” in 2024 as price increases ease.
In the US, where year-on-year inflation fell to just 3.1% in November after hitting a four-decade high of over 9% in the summer of 2022, Hatzius expects three consecutive 25 basis point rate cuts in the first half of the next year – probably in March, May and June – plus two further cuts by the end of the year. Then, in 2025, he expects three more rate cuts, so that the Fed's key interest rate will be between 3.25% and 3.5% by September of this year.
A victory lap is predicted for Hatzius. While most economists feared an impending recession earlier this year, Goldman's chief economist argued that the Fed would be able to contain inflation without triggering a serious economic downturn. His forecasts have varied from 35% to just 15%, making him one of the most optimistic forecasters on the Street.
A robust labor market, lower inflation and falling interest rates will help boost GDP growth and corporate profits next year, according to Goldman Sachs. This will be “extraordinarily favorable for risk asset markets,” Hatzius, who also heads Goldman’s global investment research department, wrote on Monday.
Many so-called risk assets have soared this year after a brutal 2022, with the S&P 500 up over 23% and the tech-heavy Nasdaq up 43%. Cryptocurrencies have also seen a surge this year as investors' appetite for risk has increased. Bitcoin is up 152% to almost $42,000, while Ether is up more than 80% to over $2,100.
David Kostin, Goldman's chief U.S. equity strategist, even raised his price target on the S&P 500 from 4,700 to 5,100 on Friday, citing “lower inflation,” “easy Fed policy” and a “more robust” economic outlook that will boost stocks next year will support this year. The new target represents around 8% upside potential for the blue-chip index in 2024. “Our stronger view of the stock market also aligns with our colleagues' upgrades on U.S. GDP growth,” Kostin said in a statement customers and referred to Hatzius' current forecast revision.
Hatzius expects GDP growth of 2% and an unemployment rate of just 3.6% for 2024. However, the chief economist also noted that his more optimistic outlook on U.S. GDP growth and unemployment could be a double-edged sword. Too much economic activity, while beneficial for the economy and stock markets, could lead Fed officials to fear a resurgence in inflation and force them to keep interest rates high for longer.
It “argues for slower cuts,” Hatzius warned, explaining that “any further positive surprises compared to this above-consensus forecast could prompt the committee to pause, even if inflation is close to target.” “
Still, Wall Street is becoming increasingly optimistic following recent strong GDP, inflation and retail sales. Morgan Stanley, one of the most bearish investment banks all year, raised its price target on the S&P 500 from 4,200 to 4,500 in November. And Jay Hatfield, founder and CEO of Infrastructure Capital Management, one of the stock market's biggest bulls, last week raised his price target on the S&P 500 to 5,500 from 5,100, a potential 15% gain for the blue-chip index on the year 2024 corresponds, even after more than this year jump of more than 20%.
Hatfield, like Hatzius, believes that “2024 will be the year of global interest rate cuts” – and that’s only good news for investors.