Gary Cohn on rate hikes: I’m in the 25 basis point camp
The Federal Reserve will have ample food for thought by the time the critical May FOMC meeting comes around. Either way, IBM Vice Chair and Former White House chief economic advisor Gary Cohn tells Yahoo Finance he thinks we're "at the end of the cycle".
His comments come in the aftermath of another 'sticky' inflation readout; despite the headline figure cooling, the core number leaves the Fed's next rate decision in some doubt. U.S. consumer prices rose just slightly in March, marking the slowest pace of increases since May 2021, according to the latest data from the Bureau of Labor Statistics.
The former number two at Goldman Sachs - a position he held during the height of the financial crisis - isn't breaking from the pack on the central bank's next move however."I'm more or less in the 25 basis point camp now," he says.
Cohn made clear he's waiting to see how Jay Powell sizes up the tighter credit landscape in May, and a new set of data at his fingertips. "With the 5% reading, banks stabilizing, we've seen a lot of movement in deposit funds. We have to...evaluate that," he adds.
Cohn spoke with Brad Smith and Julie Hyman. Watch the entire interview here.
Key Takeaways
00:00:18: 25 basis points
00:00:38: Banking system
00:01:28: End of the cycle
Video Transcript
GARY COHN: I think we're in this-- I don't know if it's a holding pattern or at the end of the cycle pattern. It feels to me like we're at the end of the cycle pattern. The debate is 25 basis points, pause, pause, pivot, or are we getting ready to pause? Is the 25 basis points not going to happen? I think I'm more or less in the 25 basis point camp now because I think with the 5% reading here, banks are somewhat stabilizing. We've seen a lot of movement in deposit flows.
And we have to sort of evaluate that because one of the things that the chairman said during the last press conference-- and I think this is very important-- is that lending conditions in the banking community are changing and changing quite rapidly. We've seen a lot of deposits move around the system. We've seen deposits move from small regional banks to larger banks, and then we've seen deposits move out of larger banks into money markets in Treasury funds. So there's less money in the system to be lent out. Once banks have to hold their excess reserves, they can lend the remaining balances. But the remaining balances today at banks are relatively low.
So the banks themselves are contracting the economy. The Federal Reserve Board understands that. I think they're trying to understand what the magnitude of that is. I've seen reports where the magnitude is of that is equal to somewhere between 25 and 75 basis points of increased interest rates. So we have to understand where that is. So I think we're sort of at the end of the cycle.
And that's why we're in this sort of holding pattern. We're holding to see what the Fed's going to say, what Powell is going to say now that we have this banking-- the sort of banking data behind us, that we've seen reserves come out of the system, that we've seen this flight to money markets. We've seen a flight to treasuries. How do they evaluate the tighter lending conditions? And how does that influence their decisions? That's why I think even when you see a more positive inflationary report today, you didn't really see a large interest rate move. You didn't see the moves that we might expect.
