Jim O’Neill, former Goldman Sachs Group chief economist, in Italy in 2019.
Alessia Pierdomenico | Bloomberg via Getty Images
Veteran economist Jim O’Neill says central banks will have to keep interest rates in major economies at around 5% for longer than the market expects, even if inflation eases.
The U.S. Federal Reserve is widely expected to hold rates steady at its next policy meeting in September, but market prices suggest the central bank will start cutting in 2024, according to CME Group’s FedWatch tool.
Traders will keep a close eye on the U.S. Consumer Price Index later on Thursday for indications of the Fed’s future interest rate trajectory.
Economists expect the CPI to reach 0.2% month-on-month and 3.3% year-over-year on Thursday, according to a Dow Jones consensus estimate. While this represents a modest increase from June due to higher gas prices, it is well below a four-decade high of an annual increase of 8.5% per year.
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Core inflation, which excludes volatile food and energy, has remained stable and is expected to reach an annual rate of 4.8% in July. The core value has also been consistently well above target in the eurozone and the UK, prompting central bankers to reiterate their commitments to keep interest rates high for as long as necessary to keep inflation moving towards 2% objective.
Policymakers have largely scaled back expectations for rate cuts, and O’Neill, a senior adviser at Chatham House and former chairman of Goldman Sachs Asset Management, agreed that a cut was likely still some way off.
“I have to say that in order to meet the challenge of falling core inflation and therefore the whole overhang of all the stimulus that has been built up over the last decade, I think that’s right,” he told CNBC’s “Squawk Box Europe.”
“I don’t quite understand the view that interest rates have to automatically start falling again in order to have a permanently more balanced world, in my opinion economically. We should keep interest rates in most developed countries around 5%. world, because they have to have some kind of positive relationship with the level of inflation if we want it to be permanently stable.”
O’Neill also suggested that the US is “well positioned to avoid a recession”, noting that inflation expectations have remained fairly stable.
“Given that some of the forces that the Fed has been fighting are starting to fade, I think it’s reasonable that this mood and this reaction from the markets may continue for a little while longer,” he said.
“I think the inflation trend is improving. In fact, I think the next twist will probably be more good news for Europe than for the US, because we’ve had a lot in the US lately and it’s only just getting started. in Europe.”