Broad supply shocks are coming, but not uncontrollable inflation. Yellen and Goldman Sachs stabilize the Fed's interest rate cut narrative.

Former US Treasury Secretary and former Federal Reserve Chair Janet Yellen said that while the sharp rise in oil prices caused by a new round of Middle East geopolitical conflicts has cast a shadow over the economic outlook of the United States and even the global economy, she still believes there is a possibility that the Federal Reserve will resume rate cuts later this year. However, in contrast to former Treasury Secretary Yellen's vocal support for Fed rate cuts within the year, the swap market and interest rate futures market have completely abandoned bets on Fed rate cuts within the year, and some traders have even started pricing in the possibility of a Fed rate hike before the end of 2026. Yellen said at the HSBC Global Investment Summit in Hong Kong on Wednesday, "This is actually a broad supply-side shock, with its impact spreading from gasoline prices to liquefied natural gas, fertilizers, food, shipping costs, and more broadly, semiconductor products, rather than another round of uncontrolled inflation." Yellen stated that while the possibility of needing to raise rates cannot be completely ruled out, stable long-term inflation expectations suggest that, for now, this extreme scenario is still unlikely to occur. Yellen's view on the expectation of Fed rate cuts to some extent echoes the view of the Wall Street financial giant Goldman Sachs. The latest assessment of the Goldman Sachs economics team is that this round of price shocks resembles mild stagflation and is unlikely to repeat the out-of-control inflation of 2022, so they still expect rate cuts of 25 basis points in September and December. Yellen and Goldman's core view on monetary policy direction expectations are consistent, that they have not turned to a "definitely no rate cut this year" or "definitely rate hike" stance because of the oil price shock. Despite the oil price shock, Yellen still believes that the Fed may cut rates this year. "I think my guess is that there might be a rate cut later this year. I think it's entirely possible, that's the main scenario. But oh my goodness, you know, a lot of things can happen," said the former US Treasury chief. The minutes of the Federal Reserve's monetary policy meeting on March 17 and 18, released last Wednesday in Washington, showed that more and more Fed officials are concerned that the high oil price shock caused by an Iran war could spread to every aspect of American society, leading to inflation moving towards a growth trajectory, and these hawkish officials made it clear that the Fed may need to consider raising rates. In the rate dot plot forecast released after that meeting, the median rate forecast given by the Fed policy makers implied that there would be a rate cut in 2026, which is consistent with the rate dot plot they gave in December last year, with no change.The majority of policy makers expected that it would be appropriate for the Fed to cut rates at least once this year when they chose to keep the benchmark rate within the 3.5% to 3.75% range in March. Yellen once again expressed concerns about the independence of the Fed's policy and warned that President Trump's demands to lower rates would damage US credibility and the credibility of the US debt and dollar system. "A developed country's presidentand our currency is the predominant global reserve currencyalmost never openly suggests in public whether rates should be set to lower the cost of servicing the federal debt?When you hear that, that's the kind of thing you typically hear in a banana republic," Yellen said. Regarding Kevin Warsh, the incoming Fed chairman nominated by Trump, whom Yellen worked with at the Fed for six years, Yellen said that, given his reputation as an "inflation hawk," he may conflict with President Trump's monetary policy stance. She said Warsh firmly believes that the wave of artificial intelligence will soon significantly improve labor productivity, which may explain why he will take over as Fed chairman. Currently, traders have largely cleared their bets on rate cuts by the Fed this year. At the beginning of this year, rate futures market traders generally expected about two rate cuts. Earlier this week, Chicago Fed President Charles Evans, who has always been dovish, said that if the Iran war leads to long-term high oil prices and slows down inflation's return to the Fed's 2% target, the Fed may need to wait until 2027 to cut rates. Speaking at the Semafor World Economic Congress, Evans said, "I originally thought there might be multiple rate cuts in 2026; but if this continues, and we still don't see inflation coming down and inflation remains high, realistically, this will delay to after 2026. Our job is to bring inflation back to 2%." "If the new round of oil price shocks caused by the Middle East geopolitical conflict is resolved, inflation falls again, and it seems like we are returning to the 2% target, then rate cuts will also be put back on the agenda." Goldman Sachs: Difficult to repeat the global high inflation period like 2022 Yellen's latest views can be seen as "indirectly supporting Goldman Sachs' judgment that the oil price shock is not enough to completely shut down the window for rate cuts this year." Although the Strait of Hormuz remains effectively blocked by the Iranian military, which will indeed pose a new energy supply shock to the US economy, as markets increasingly believe that the US and Iran are about to reach a long-term peace agreement, Goldman Sachs believes that its macro nature is closer to mild stagflation rather than a comprehensive shock that reshapes the global inflation path as seen in 2022. A very crucial judgment in Goldman Sachs' macro framework is that this high oil price will not, as in traditional cycles, induce significant capital spending expansion in the US shale oil industry; within this framework, Goldman Sachs has raised its inflation, lowered its GDP and employment expectations, while maintaining the prediction of two rate cuts this year (in September and December). Goldman Sachs believes that after experiencing several cycles, US oil and gas producers have significantly strengthened their capital discipline and are more cautious about short-term geopolitical-driven oil prices rises, rather than quickly expanding production. This means that, in Goldman Sachs' view, the net effect of this round of energy shocks on the US economy will be more of a drag on the consumption side, rather than forming effective growth hedging through energy investment rebounds. In other words, the US economy is facing "negative purchasing power shocks" rather than "reinvestment expansion brought about by energy prosperity," so the pressure on the economy to decline is more pronounced than industrial compensation. It is also because Goldman Sachs defines this round of shocks as "stagnation of growth outweighing the re-acceleration of inflation" and not a "repeat of the inflation nightmare of 2022," that it still maintains its judgment of 25 basis point rate cuts in September and December. The policy logic behind this is: a slight rise in the unemployment rate, mild core inflation falling back, and the gradual fading of the impact of previous tariff disturbances on year-on-year inflation are still enough to provide room for rate cuts; while the upward pressure brought by rising energy prices may exist, it is not enough to force the Fed to turn to panic-induced rate hikes. Of course, Goldman Sachs also acknowledges that if some members of the Fed FOMC still believe that inflation stickiness is still relatively high, combined with the uncertainty of the Fed leadership change, the pace of rate cuts may still face controversy, but its main conclusion has not changed: this is not a repeat of the 2022 inflation nightmare, but a controllable but underestimated stagflation disturbance.