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Fed is 'not completely done' fighting inflation: Gary Cohn

As Wall Street debates when the Federal Reserve will announce its first rate cut, IBM Vice Chair Gary Cohn told Yahoo Finance investors 'misread' the Fed's policy outlook.

"The Fed is continually fighting inflation because their risk right now is backing off too early," Cohn explained. "I don't think the Fed is completely done fighting inflation... they've left themselves optionality to stay the course longer if needed."

Cohn added, "We’re headed toward a more normal economic trend, something that we haven't seen in over 15 years, and I think we all forget what normal looks like… and employment continues to remain strong, and I think it will remain strong throughout the year.”

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

SEANA SMITH: The timing of a Fed rate cut is driving the market action this year. We will get another look at inflation with the CPI print on Thursday, while Atlanta Fed President Raphael Bostic weighing in ahead of the data, signaling that inflation is quote, "on a path to 2%, but the goal is to stay on that path."

For more on the state of the economy, where things stand, and all things election, we want to bring in Gary Cohn. He's the vice chair of IBM. Gary, it's great to have you on set here with us.

GARY COHN: Thank you so much for having me.

SEANA SMITH: So let's start with where things stand with the economy right now. I think the big debate is the timing of the Fed rate cut, and whether or not the battle for inflation, getting inflation under control is done. What do you think?

GARY COHN: Well, look, I think the Fed is continually fighting inflation, because their risk right now is that they haven't done too much. Like if they sit there and they look at the risk-reward scenarios in that Fed meeting, they say, look, our biggest risk at this point, having been a little bit late to trying to tame inflation, is that we back off too early.

So I think that-- in my opinion, people misread the last news conference. And they said, OK, the Fed is completely done. They're done fighting inflation. I don't think they're completely done fighting inflation. I think the Fed believes that they've done enough, but they've left themselves optionality to stay this course longer if they need to stay. And I don't mean staying the course is raising rates. Staying the course may be staying at these restrictive rates for a longer period of time than I think the market has priced in at this point.

BRAD SMITH: And the market right now-- at the March meeting, it sounds like-- is looking for a cut. The first of the year, the first that we have seen since the Fed really began and had moved off of the "transitory" word even. So all of this considered, what grade would you give the Fed and FOMC Chair, Jay Powell, in how they were even able to tame and perhaps even get to that 2% target?

GARY COHN: Well, look, I think the Fed-- once they started getting involved in fighting inflation, and they got off the transitory stance-- and look, it was hard. We came out of a very unique circumstance of COVID and supply chain that didn't work. And there was a potential thought that it was very transitory.

And once the Fed moved off the transitory position into realizing look, we've got a real problem here with inflation, they did move very quickly. You saw them go from 25 basis point increases to 50 basis point increases very quickly. So they did do a good job trying to catch up with the inflationary pressures in the economy.

Now they've got themselves to a restrictive rate. The question is now, how long do we need to stay at a restrictive rate? Will this continue to be a restrictive rate? I think most of us believe this is a restrictive rate, but the economy continues to grow. Most people believe that the only way to stop inflation is to tamp down employment and create more unemployment.

So far, we've not seen that. We've sort of had a inflationary-- a de-inflationary economy but strong employment, which those historically have not gone together. And now, that said, we've seen a lot of things historically that have not gone together.

SEANA SMITH: Is that going to continue, though, to be the case, I think is the big question right now. If we are going to be able to avoid a recession, if, like you said, maybe the Fed needs to keep rates at a more restrictive level than maybe the market is at least pricing in right now.

GARY COHN: So the employment picture is softening. But remember, it's softening from very, very, very strong levels. So if you look at the JOLTS data, or even if you look at the unemployment data, and then you have to look at the revisions to unemployment, there's some softening in there.

We see in the JOLTS data-- and the thing that I look at in the JOLTS data is you look at quits. Quits, to me, is a very important number. People quit their job when they know they can get a better job that pays them more. The quit rate has come down quite dramatically in the JOLTS data. So people are no longer confident that I can leave my job and get a higher paying job.

We've seen the amount of job openings come down in the United States. That said, there are still more job openings in the United States than there are unemployed people. So we're still in a quite accommodative situation from a labor market.

So I do think that we have tamed inflation. I do think that we are heading towards a more normal economic trend, something that we haven't seen in over 15 years. And I think we all forget what normal looks like in an economic trend. But employment continues to remain strong. And I think it's going to remain strong throughout the remainder of the year.

BRAD SMITH: You've, of course, had a storied history across Goldman Sachs as well. I mean, you think about the bank earnings that we're set to get later on this week, and you combine that with the rate cuts that we're talking about and considering here. How well positioned are the banks for the potential fleet of rate cuts that we could see over the course of this year, if some have projected?

GARY COHN: Well, look, if you're running a traditional bank-- and the vast majority of the thousands of banks in the United States are traditional banks. The most favorable environment for a bank is a positively shaped yield curve. We have been operating in an inverted yield curve, which is, again, this not traditional economic cycle. It's not traditional environment that we have.

Traditionally, banks borrow overnight or borrow from depositors at the front end of the curve at a much lower rate than they can lend out to consumers and mortgages and fixed-rate instruments at a much higher rate in a positively shaped curve. Right now, we have an inverted curve, where, ironically, the cheapest mortgage a home buyer can get today is a 30-year fixed-rate mortgage, because the long data maturities are cheaper than short-term floating rate mortgages, because the curve is inverted.

If we go to a more normalized environment, and the Fed starts cutting, I think the front end of the curve comes down. I'm not sure the back end comes down. And we go to a much more favorable environment for the banking community because the cost of funding goes down dramatically. But I don't think the cost of-- the money they receive on lending money goes down.

SEANA SMITH: Gary, I want to switch gears just a bit, still sticking with the economy, but looking ahead to the 2024 election. About one week here from the Iowa caucuses. We have seen-- when you take a look at the poll numbers, it's pretty astounding how dramatically Nikki Haley is starting to surge in some of the poll results that we've been getting over the last several weeks.

I'm curious to get your perspective just on how confident you are that Nikki Haley will be able to beat or could potentially beat Donald Trump here. And when it comes to looking ahead then to the general election in November, why do you think Wall Street-- many Wall Street leaders are backing Nikki Haley?

GARY COHN: Look, I think what Wall Street is saying is like, we like elections. We like to hear people's point of views. We like the issues to be discussed. That's what the democratic process in the United States is about. We don't like a primary system where there's not competition.

So it's going on in the Democratic side, there's no competition because you've got an incumbent. On the Republican side, you now have a primary process going on where the public is getting to hear a variety of views and a variety of opinions, and they get to make their decision based on the policy and opinions that they like.

And I think Wall Street, like most of the world, would like to hear a variety of opinions and how people would deal with the current situation that we're in. Because look, we're in a pretty tough environment in the world today, not just economically, but if you look at the geopolitical environment and you look at the political environment, we've got a lot of problems around the world.

BRAD SMITH: Just quickly, if the party's nominee was former President Trump, do you believe that he would receive the same type of Wall Street support that's pouring into some of the other Republican campaigns?

GARY COHN: I think once you get through the primary system and you get a nominee late into the summer, I think that businesses will decide who they want to back, who's in their best interest based on their policies. I think the important issue here is policy.

Policy drives opportunity. Policy drives the economy. Policy drives business environment. And that's what Wall Street, and that's what the industrial community, and that's what the automotive industry-- that's what they'll make their decisions based on. And also, there's social issues that they're going to think about.

BRAD SMITH: Right, even if the candidate went against the democratic process that you mentioned a moment ago?

GARY COHN: They're going to think about all of those issues. And that's what the democratic process is all about, laying all those issues out on the table.

BRAD SMITH: Gary, always a pleasure to speak with you, get some of your insights here on a myriad of different topics always. Gary Cohn, IBM vice chair, thanks so much for joining us today.

GARY COHN: Thanks for having me.