Goldman Sachs president flags inflation as biggest risk with PCE at 3.8%

Goldman Sachs President John Waldron called inflation the economy's "biggest single risk factor" just as the April PCE report showed headline inflation accelerating to 3.8%, the hottest reading since 2023, while GDP growth was revised lower.

"Inflation is probably the biggest risk factor and the one I'm most concerned about personally," Waldron said Thursday at the Bernstein Strategic Decisions Conference. Higher global long-term rates "could have an impact on capital costs and consumer behavior across the entire economy," he added.

The data reinforces his concern. The Commerce Department's April PCE report showed prices rising 3.8% from a year earlier, while a separate release revised first-quarter GDP growth down to a 1.6% annualized pace from the initial 2.0% estimate. The personal saving rate fell to 2.6%, the lowest since June 2022, as households drew down reserves. Personal income dropped 0.1% on the month, and real disposable income fell 0.5%.

The combination of accelerating inflation and decelerating growth — the macro signature of the Strait of Hormuz energy shock — has hardened the resolve of Federal Reserve officials. Fed Governor Christopher Waller said the next move is now as likely to be a hike as a cut, while Minneapolis Fed President Neel Kashkari warned consumer prices remain "much too high."

The Bond Market Is Already Pricing the Shift

The Treasury market is reflecting the hawkish repricing. The spread between five-year and 30-year yields narrowed to 81 basis points on Friday, the tightest in a year, driven mainly by a selloff in shorter-dated debt more sensitive to Fed policy expectations. Traders are increasingly betting that the Fed under new Chairman Kevin Warsh will keep rates higher for longer, or potentially raise them. JPMorgan Chase Chief Executive Officer Jamie Dimon said rates may climb further.

Oxford Economics chief US economist Michael Pearce attributed the GDP revision to a slowdown in profit growth and a larger-than-expected decline in stockbuilding. While he still expects a wave of restocking to materialize, the impact of the war and related supply-chain stress means that rebound may not arrive until late this year or early 2027.

Fed Hawks Dig In

The hawkish pivot extends across the Federal Open Market Committee. Fed Governor Lisa Cook said inflation is clearly moving in the wrong direction and that rates will rise if expected disinflation does not materialize in a timely manner. Vice Chair Philip Jefferson indicated that disinflation had stalled over the preceding year because of tariffs, with energy costs now pushing inflation notably higher. St. Louis Fed President Alberto Musalem cautioned against betting that an AI-driven productivity boom will solve the inflation problem, invoking the 1970s — when the Fed wrongly blamed oil shocks — as a warning against complacency.

Equities Look Through the Pain

Despite the macro headwinds, the S&P 500 surpassed 7,550 points for the first time on Friday, and Goldman Sachs raised its year-end target to 8,000 from 7,600, citing a solid earnings outlook. The divergence between equity optimism and bond market caution captures the central question: whether the inflation shock proves transitory once the Hormuz disruption resolves, or whether it forces the Fed into a tightening cycle that eventually catches up with stocks. The US is now projected to have the worst inflation among G7 countries in 2026, according to IMF forecasts.

This article is for informational purposes only and does not constitute investment advice.