Gary Cohn, vice chairman of International Business Machines Corp. (IBM) and former chief economic advisor to President Donald Trump, shared his views on the U.S. economy and the Federal Reserve’s interest rate policies during the Milken Institute Global Conference in Beverly Hills, California on Tuesday, October 19, 2021.
Cohn believes that the U.S. economy has returned to a state of normalcy for the first time in two decades but cautioned that the market is getting ahead of the likely pace of interest rate cuts. According to Cohn, the market is pricing in a first rate reduction from the Federal Reserve in May 2024, with around 100 basis points of cuts expected across the year. However, Cohn does not see the Fed cutting interest rates until the second half of 2024.
The Federal Reserve has recently paused its historically aggressive monetary tightening cycle, with the Fed funds rate target range currently at 5.25-5.5%. It was previously at just 0.25-0.5% in March 2022. Cohn does not expect the Fed to start unwinding its position until at least the second half of next year, after similar moves from other major central banks that began hiking sooner.
Despite the recent increase in U.S. consumer price index, Cohn highlighted that U.S. consumer debt has soared to record highs of over $1 trillion, and consumer spending is persisting despite tightening financial conditions. He believes that the U.S. consumer and the broader economy are “back to a normal, but we all forgot what normal is.”
Cohn also noted that the 100-year average for 10-year U.S. Treasury yields is around 4.5%, and that the 10-year yield has moderated from the 16-year high of 5% logged in October to around 4.3% as of Wednesday morning. In addition, inflation is “running back towards the mean” of between 2% and 2.5%.
In conclusion, Cohn believes that every piece of economic data indicates that the economy is heading back towards its very long term average, and that the U.S. seems to be entering a new phase in its generational economic cycle. He shared his views at the Abu Dhabi Finance Week conference on Wednesday, where he emphasized the need for caution and patience when it comes to making predictions about the future of the U.S. economy.