Investors who are overly optimistic could threaten a soft landing

A senior International Monetary Fund official warned that “exuberant” investor optimism could undermine hopes for a soft landing of the global economy.

Gita Gopiath, the deputy managing director, said to delegates attending the World Economic Forum, that traders are making “premature bets” on the huge rate cuts expected from major central banks around the world this year.

The markets expect central banks to reduce rates aggressively. Gopinath stated that it was premature to draw such a conclusion. “We can expect to see rates drop at some point this year. But based on what we’re seeing now, this is more likely to happen in the second half.”

The money markets have already priced in a rate cut of about 1 percentage point in the US, eurozone and the UK this year.

Investors are encouraged by the steady decline in consumer prices. This has slowed down from double-digit rates seen at the end of 2022. Central bankers warn against overconfidence because falling expectations of rates could cause financial conditions to loosen and inflation to rise.

The disruption of the Red Sea could also threaten global energy and shipping costs, as western countries have started bombing Yemen Houthi rebels.

Gopinath spoke to a group of investors and policymakers in Davos. She said that the likelihood of a “soft landing” – where inflation rises to 2 percent without causing a recession or mass job losses – was increasing quite a bit. She said that “exuberance in the market” was a major challenge.

She said, “We think the chances of a soft landing have increased quite a lot because inflation has dropped without requiring that much loss in economic activity.”

Francois Villeroy de Galhau is the French central bank governor, and a member on the governing council of the European Central Bank. He told delegates the ECB would likely cut rates this year, but he did not specify a specific date.

“Unless there are major surprises — just look at the Middle East – our next step will be to cut back, most likely this year. Villeroy said to a panel at the World Economic Forum, “I will not comment on this season.” It’s still too early to declare a victory. “I agree with Gita completely that the work isn’t yet done.”

Kristalina Georgeeva, IMF managing director, also spoke in Davos. She said that the US economy is most likely to experience a soft landing due to lower prices and a stronger labour market.

Bloomberg TV reported that “the world economy, and in particular the US economy, has shown to be remarkably resilient.” “2023 is better than expected by just a little bit.” “There is some wind coming in 2023 and 2024.” Georgieva hinted that the IMF could provide a slight upgrade of its global growth projection this year, when the new projections at the end are released.

Separately, an official at the Federal Reserve said that the US central is “nearly there” in bringing inflation back to the rate-setters 2 percent goal.

Christopher Waller said, at an event hosted by the Brookings Institution on Tuesday, “Based on the economic activity and cooling of the labor market, I’m becoming more confident that a sustainable 2 percent PCE inflation level is within reach.”

Waller’s comments are closely monitored after a November speech in which he signaled confidence that the Fed was on top of the worst bouts of inflation since a generation, and paved the way for the pivot to a dovisher policy stance. The markets became more optimistic that the Fed would cut rates by March. However, officials have refused this timetable.