Goldman Sachs' Alexandra Wilson-Elizondo: We expect a rate cut & 'hawkish tone' during the presser

The Federal Reserve is expected to implement a 25 basis point cut, though the accompanying tone is anticipated to be hawkish. This decision is influenced by a dual mandate facing pressure, particularly evident in the labor market's weakness. Despite inflation remaining elevated, the Fed is moving forward with cuts, aligning with projections for unemployment near 4.5% and core PCE around 3%. This move is seen as the beginning of a signaled path, with the Statement of Economic Projections indicating two cuts.

The market's reaction is expected to diverge, with the bond market anticipating sideways movement due to six cuts already being priced in. In contrast, the equity market is poised for a significant rally, especially in non-recessionary cutting cycles where stocks have historically seen a 15% average return over the following 12 months. This optimism is further bolstered by the robust growth in the AI sector, with a new trillion-dollar company emerging, validating speculative growth as actual, multi-year projections.

Both the Federal Reserve's actions and AI spending are considered equally crucial for the market. Rate cuts are vital for individuals with floating rate debt and corporations, acting as the economy's lifeblood. Simultaneously, the AI narrative continues to drive substantial investment and offers significant growth potential.

• The Federal Reserve is expected to announce a 25 basis point rate cut with a hawkish tone.
• Inflation is still trending sideways and is not close to the 2% target.
• The labor market has shown weakness, influencing the decision to cut rates.
• The bond market anticipates sideways movement, with six rate cuts already priced in.
• The equity market is expected to rally significantly, with a 15% average return over 12 months in non-recessionary cutting cycles, fueled by AI spending.

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Federal Reserve Expectations [00:02]

• Goldman Sachs expects a 25 basis point rate cut from the Federal Reserve.
• The tone of the press conference and comments from officials are crucial, as is the outlook presented in the forward dots and any dissents, especially considering changes in Fed composition.
• A "hawkish cut" is described as somewhat unusual, similar to a "hold your nose type cut."
• The Fed will acknowledge pressure on both sides of its dual mandate, justifying the initiation of cutting.
• Inflation is at best trending sideways and is far from the 2% target.

"So, we're expecting a 25 basis point cut. Uh we do to your point earlier think that it should be somewhat of a hawkish tone however in the presser..."

This section highlights the anticipation of a 25 basis point interest rate cut, tempered by expectations of a hawkish undertone from the Federal Reserve. The speaker notes that inflation remains a concern, not yet approaching the desired 2% target, despite the impending rate reduction.

Rationale for Rate Cuts and Market Data [01:14]

• It is difficult to avoid cutting rates when weakness is observed in the labor market, given the dual mandate.
• From the June Statement of Economic Projections (SEP) to the present, spot data has materialized as forecasted.
• The unemployment rate is trending towards 4.5%, and core PCE is around 3%.
• The Fed had marked in two cuts, and this move is seen as the beginning of a signaled journey.
• The Statement of Economic Projections (SEP) is Wall Street's term for the Fed's forward-looking assessment.

"I I think it's very difficult if you really do have this dual mandate to not start to cut when you see the weakness that we've seen in the labor market."

The speaker explains that labor market weakness, even with persistent inflation, necessitates rate cuts due to the Federal Reserve's dual mandate. Current economic data, such as the unemployment rate and core PCE, aligns with the Fed's prior projections, supporting the initiation of these cuts.

Market Reactions to Fed Actions and AI Spending [02:08]

• The bond market and equity market are expected to have different responses to the Fed's decision.
• The bond market is anticipating six rate cuts, expecting them to occur linearly.
• The speaker expresses doubt that everything will materialize as expected and questions if three expected market cuts will be pushed into the following year, potentially flattening the yield curve.
• The timing of the cut (December vs. January) is not considered significant.
• On the bond side, with a hawkish tone and rate cuts, the bond market is expected to trade sideways, as yields have already priced in six cuts.
• Bond yields in Europe rose when rates were cut, and have recently stopped falling, leading to a flattened European bond market.
• The equity market is trading on two different themes, including the $500 billion in global capex related to AI.
• A new company has entered the trillion-dollar club, an unexpected development, validating the speculative growth in AI as real and projecting multiple years out.
• There is still significant room for growth in the AI sector.
• Non-recessionary cutting cycles typically lead to a 15% market increase over the next 12 months.
• A 100% hit rate is observed for non-recessionary cutting cycles, with average returns exceeding 15% even when stocks are at all-time highs.

"So, when we're talking about the market, like, well, I think the bond market and the equity market um will have a different response and I'll get into that in a minute."

This segment contrasts the expected market responses, with the bond market likely to remain stable due to priced-in expectations. The equity market, however, is poised for substantial gains, driven by both the anticipated rate cuts and the significant, validated growth observed in the AI sector.

The Importance of AI and Fed Decisions [05:22]

• The speaker considers both the Federal Reserve's meeting and AI spending to be equally important to the market, rather than a zero-sum game.
• Rate cuts are crucial for individuals with floating rate debt and for corporations, representing the "lifeblood of the economy."
• The AI story is also important and continues to be a significant driver.
• Lowering rates is generally desired by political leaders, regardless of party.

"I I wouldn't say it's a zero- sum game. I think the both are equally important."

The discussion concludes by emphasizing that both the Federal Reserve's monetary policy decisions and the ongoing investment in artificial intelligence are of paramount importance to market performance, serving distinct but equally vital roles in economic health and growth.