Why The Fed Is Still Cautious About Inflation

Inflation may not be cooling as quickly as some investors may think, says Anshul Sehgal, head of US Interest Rate Products Trading in Goldman Sachs Global Banking & Markets, on this week’s episode of The Markets podcast.

Core Consumer Price Index (CPI) inflation in May came in well below expectations at 0.16% month-over-month, the slowest pace since August 2021. But according to Sehgal, there were elements of the report that weren’t as promising as it appeared on the surface.

Some sectors that aren’t as sensitive to interest rates, like healthcare and medical services, “remain sticky” when it comes to inflation, he says.

In an interview with Ashish Shah, global co-head and CIO of Public Investing with Goldman Sachs Asset Management, Sehgal notes that financial markets may have overreacted to the data. “One print does not make a trend,” Sehgal says.

Also this week, the Federal Reserve indicated it would likely only cut its policy rate once this year. The US central bank had previously signaled that three rate cuts were likely.

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While the shift may have been surprising, especially coming on the back of tamer inflation data, Sehgal points out that the US job market “remains incredibly strong,” which could eventually drive up wages and reignite higher inflation.

“It makes sense for the Fed to be cautious,” he says. If inflation stays low in the coming months, the central bank can always change its plan and move to two policy rate cuts, Sehgal adds

Market Outlook for years ahead

“I’m a little intrigued about the 33%,” said Padi Raphael, the global head of Third Party Wealth Management within Goldman Sachs Asset Management.

“That same cohort also responded that they were interested in hedging solutions to mitigate some of the downside risk in markets that they were anticipating.”

Raphael’s observation chimes with what Adam Siegler, who leads the One Goldman Sachs RIA strategy for Global Banking & Markets, sees in terms of investment product demand.

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“We’ve seen tremendous growth in the structured notes market,” Siegler said. “A lot of these notes provide downside protection embedded in them, so that an investor can stay invested in the market but also have capital protection built into the structure.”

He adds that the growth is unsurprising in the current environment, “because people want the equity exposure on the upside [and] some hedging on the downside.”

=courtesy Goldman Sachs