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Joining us now for more Goldman Sachs chief economist Jan Hatzias. You know, you have IMF for the US alone, reducing growth and increasing inflation expectations. You have the President of the United States really pushing the Federal Reserve to cut interest rates and threatening here J Powell's job. Do you think the Fed does in case in fact have room to cut interest rates? Is there a case for that to happen given the inflation concerns.
It's complicated because clearly the growth outlook has the terior rate it very significantly on the back of these tariff announcementths and we've downgraded it by more than the IMF has. We're looking for only really barely positive growth in two thousand and twenty five zero point five percent fourth quarter to fourth quarter. But at the same time, the inflation outlooks also deteriorated, and we're probably going to get back to the mid threes, if not higher for core inflation.
So I think the FED is going to probably take away to see attitude at least for the next meeting, because I think at this point it's unclear what is going to win out, what are the drivers of the ultimate decision. I think number one, do we see a significant deterioration in the labor market a significant increase in unemployment that would make cuts a lot more likely. And then number two, what do we learn about inflation expectations?
Do they stay anchored? And I think if you see deterioration in the labor market and pretty good inflation expectations numbers, then I would expect some cuts before too long. We have three the three cuts twenty five basis points in June, July, September, but that's going to really depend on the economic data.
Right, So there could be a case for cuts, but it sounds like it doesn't quite exist yet. I want to get your thoughts on on another story that's been developing over the past week or so, and that is that Trump reportedly talking in private about options what it would look like if he could removed your own pal from Federal Reserve chairmanship. And I'm curious what you think that the reactions specifically in the Treasury market would look like were that to happen.
Well, I think we've seen it in the last couple of weeks when that has come up last week and then again over the weekend and yesterday we have seen significant tightening and financial conditions with increases in bond yields and declines and inequity prices, and also weakness in the DORA. But for net net it has tightened our financial conditions index whenever that has come up, and so I think gives you sort of a foretaste of what would happen
if we really did go down this road. There are a lot of legal issues around this, and I'm of course not a lawyer, so I don't know what the ultimate adjudication would be, but it is it is clearly something that has had a significant impact on financial markets.
I want to ask you about Torsten Slock's forecast ninety percent chances of what he calls a VTR are a virtual trade reset recession. He notes that eighty percent of US employment, eighty five percent of CAPEX comes from small businesses and they have a much tougher time dealing with these tariffs. He says, expectancye ships it off shore, orders canceled, and well run general Retailer's file for bankruptcy. Why aren't you as concerned as Apollo's economist.
Well, ninety percent is a very confident view on almost any outcome. I don't know if that refers to the standard definition of a recession, which is really the National Bureau of Economic Research determination on that basis, We're at forty five percent for the next twelve months, which is definitely a high risk of recession. It's practically a toss up. But I think the questions at the moment are, do we see a weakening of the hard data that is similar to what we've seen in the in the soft data,
what's going to happen to the average care rate? And I think the pullback that we saw on April ninth does give us more of a chance of avoiding recession. And how big of a tightening in financial conditions do we see? There was a very rapid tightening between April second and April ninth. Some of that has unwound, so it's it's definitely a significant growth drag. But whether it's a recession, I think it's a little too early to tell.
And I just to double down on Shanali's first question, then why doesn't jerme power cut rates? Now? If the soft data looks this bad, don't you want to stop it from solidifying into really bad hard data. Wouldn't a rate cut, a pre eminent rate cut now be the right move from the Fed?
That would be the argument in favor of a rate cut. The argument against would be that you also wouldn't want the very likely increase in inflation to harden into second round effects and ongoing higher inflation. That's that's the other side of the mandate. And I think at this point the FED is not going to be preemptive, but probably more reactive because they need answers to those questions.
Yeah, and we were speaking just a day ago to Claudia sam And one point you seem to make here was that if the FED does cut interest rates here does it look like political pressure. The issue that might be being created right now with the President's pressure on the Federal Reserve is politicization of the FED. Therefore the
Fed's credibility. Do you think that this has the potential to create some crisis of confidence frankly in an institution that has been the backstop of this market for now, you could argue the better part of a decade at least.
Well, it certainly raises risks. I think the way to address those risks if you're sitting in the FMC is to really be very clear that they're focused on the data and take into account what's happening in terms of the growth outlook and the labor market, but also look at the inflation outlook. I think, I mean, you don't want to cut because of political pressure, but at the same time, you also don't want to refuse to recognize reality.
If the way that the outlook breaks is that we see, you know, a any significant deterioration in the labor market, then I think they should respond to that, and I think they will respond to that.
Let's talk a little bit more about FED independence, because let's say that Jerome Pal stays on for the full length of his term May twenty twenty six. But the genie's out of the bottle here, Yan. We know that political pressure exists even if Trump doesn't take the ultimate
step of removing Jerome Pal. And I wonder when we get that next Trump appointee to run the Federal Reserve, what does it look like when you think about the board holistically, is it possible that we see more dysfunction, more dessense when you think about the future of the FED.
Well, I wouldn't call the sense dysfunction. I think it's actually quite normal to disagree, and we've had the sense over the years, and if you look at other central banks outside the US, it's actually much more common to have the sense, and I don't think there's anything wrong with it, so that I don't worry about as much. Now, we of course have to look at how the board of governors evolves, and of course there's also the reserve bank presidents. The FOMEC is seven governors and at any
time five reserve bank presidents. So it is an institution that has, you know, quite a lot of institutional stability, even in an environment where the president gets to appoint a new chair and new governors, but it takes quite a long time. So I think there is you know, there are some significant safeguards built into the system, and I certainly don't worry about the sense very much.
Yeah, and I spent a lot of my time I started my career covering investment banks here, so the structuring advisors are the ones that I'm calling the most these days. As an economist, how do you see the economy weakening? Where are you sharpening your pencils the most to see that fall off? The cliff that we're standing on well.
In terms of sectors of the economy, I think you want to look at number one, what's happening to consumer spending as real incomes decline, you know, as prices rise and that eats into real income on the back of the tariffs. I think that's going to happen over the
next few months. And then number two, business investment. I think you're particularly going to be focused on the uncertainty effects, the potential for firms to just wait it out until they have more clarity, So high frequency capital spending indicators are going to be helpful as well. I think there you probably do want to focus pretty closely on surveys of capital spending intentions because the hard data are very lagged and you're not going to learn in time what's
going on. But I think those are really the two areas that are probably most important. Obviously, the trade data are going to be important, but they're going to be enormously volatile because of pull forward effects and then changes and trade flows. But for the domestic economy, it's really consumption. Gen Kapix