Solomon Says Fed Will Forgo Emergency Cut Despite Weak Jobs Data

(Bloomberg) -- Goldman Sachs Group Inc. Chief Executive Officer David Solomon predicted the Federal Reserve will avoid taking emergency steps to lower borrowing costs as he sees the US economy skirting a recession.

“I don’t expect that you’ll see anything before September,” Solomon said in an interview for an upcoming episode of The David Rubenstein Show: Peer to Peer Conversations. “The economy will chug along and we probably won’t see a recession.”

Investors stepped up bets that policymakers would act before their regularly scheduled September meeting after stock markets around the world plunged and employment data on Friday showed the US economy weakening more than expected. Derivative markets at one point Monday reflected a 60% probability that the Fed would cut rates within a week.

Those bets now show investors seeing little chance the US central bank reduces rates prior to September, but they still expect a half-point cut at the two-day meeting that ends on Sept. 18.

“Based on the economic data we’re seeing now and the messaging from the Fed, I think it’s likely that we’ll see a cut or two in the fall,” Solomon said.

The CEO said markets had been jolted by the decision last week by Japan’s central bank to hike that country’s borrowing costs. The move forced many investors to undo their so-called carry trades, in which they borrow at low rates in Japan and buy higher-yielding assets elsewhere. That unwinding has more room to run as the yen remains undervalued, according to strategists at JPMorgan Chase & Co.

Many investors had also been counting on a soft landing for the US economy, a forecast some are now hedging after the employment data last week, according to Solomon.

“It wasn’t a horrible job report, it was just softer than people were expecting,” Solomon said in the interview.

Recession Odds

Solomon has said previously that the market was overly optimistic about the pace of cuts, and he even suggested in May that the Fed could still elect to make no cuts at all this year, a view he has since tempered. Goldman economists increased the probability of a US recession in the next year to 25% from 15%.

As the market reorients itself to new economic data and revised expectations for what’s coming from central banks, the jolts will be felt for a little bit longer, according to the 62-year-old Goldman CEO.

“I do think that we’re getting a correction here after a very strong run in the markets, and that might be healthy,” Solomon said. “I think we’re going to see more volatility in the short-term here. This was a pretty big, pretty meaningful correction.”

For the full interview with Goldman Sachs Chairman and CEO David Solomon, watch “The David Rubenstein Show: Peer to Peer Conversations” on Bloomberg Television Wednesday Aug. 14 at 9:00 p.m. in New York.

--With assistance from Liz Capo McCormick.