This week, world leaders and business executives gathered in Davos, Switzerland for the 2024 World Economic Forum, hosting conversations about climate change, geopolitical conflicts, artificial intelligence and, most importantly, interest rates.
In response to the highest inflation levels since the 1980s, the U.S. Federal Reserve has raised the federal funds rate—a benchmark for mortgages, credit card and car loan rates—by more than 5 percentage points over the last 16 months. The aggressive monetary policy tightening led some economists to worry interest rate hikes could lead to a recession.
Market sentiment finally began to change in late 2023 as inflation cooled substantially. But Fed officials offered noncommittal forecasts, even warning that further rate increases might be needed depending on economic conditions. At its latest policy meeting in December, the central bank held its key interest rate steady at 5.25 percent to 5.50 percent for the third consecutive time.
Here’s what major bank CEOs and central bank officials are saying about interest rates at Davos this week:
U.S. bank CEOs and investors expect rapid rate cuts in 2024
Anticipation of multiple rate cuts in 2024 has fueled a rally of major U.S. stock indexes in the past three months. Many investors believe the Fed is steps away from achieving its goal of a soft landing, where an overheated economy shifts to slow growth without going into a recession.
“The market is clearly running ahead to a position of many cuts. There’s no question we’ve made a lot of progress on inflation,” Goldman Sachs (GS) CEO David Solomon told CNBC in Davos yesterday (Jan. 17). “Depending on how the progress moves from here, that’ll spell the direction of policy.”
Solomon admitted he’s seen some signs of a soft landing but cautioned against over-optimism. “I think it’s hard for me to see the market’s view of seven cuts this year,” he said. “I do think there’s a reasonable possibility of some interest rate cuts this year, some easing. But it’s really gonna be dependent on what the data says.”
Bank of America (BAC) CEO Brian Moynihan said his research team predict there will be four interest rate cuts in 2024 and another four in 2025 until long-term interest rate stays in the 3 percent to 3.5 percent range. “People say it’s higher. But in the grand scheme of history, that’s not higher. It’s just higher since the financial crisis,” Moynihan told Yahoo Finance in Davos on Jan. 16.
Anne Walsh, the chief investment officer at Guggenheim Investment Management, a U.S.-based global asset management firm, predicts six Fed rate cuts this year as a result of the threat of a possible economic downturn. “We’re just a little bit more concerned that the economy will slow down more than that soft landing view,” Walsh told Yahoo Finance in the same interview.
Europe’s central bank officials appear more cautious
Christine Lagarde, president of the European Central Bank (ECB), has said it’s not possible to specify a date for rate cuts and that any move will hinge on having certainty that inflation is cooling to the central bank’s target of 2 percent.
Francois Villeroy de Galhau, governor of the Bank of France and a member of the Governing Council of the ECB, told Bloomberg Television on Jan. 16 the ECB would likely lower borrowing costs later this year but noted rate cut decisions will need to be guided by data.
“It’s too early to cry victory, but when you looked at what monetary policy achieved in the last 12 months, we can be rather confident,” Villeroy said. “Expect very probably a rate cut this year but the question of a season is a premature one.”
Villeroy was echoed by his ECB colleague Joachim Nagel, the president of Germany’s central bank Deutsche Bundesbank. “We still have a very high core inflation rate in Europe, in Germany, and that’s why it would be good to wait for the data. Then we’ll decide in the Governing Council on where to take policy,” Nagel said during a panel discussion on Jan. 16 broadcast by German news channel n-tv.
Villeroy emphasized the importance of patience when chasing the ECB’s ambitious inflation reduction target. “We must have the inflation outlook anchored around 2 percent—solidly and durably,” he said on Bloomberg TV. “Solidly means we look at effective data including core inflation and wages; durably means we look at forecasts but also inflation expectations.”