Goldman Sachs Chief Economist Jan Hatzius Talks Inflation

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We're going to bring Jan Hatis, of course, he's chief economists at Goldman Sachs. When you think about the balance of risks right now, we've had strong economic data keep coming through the pipe for the last couple of weeks.

Are you more concerned about jobs or inflation?

I'm pretty optimistic on both. I think we're set up probably for another year of pretty strong growth. I mean, we're at two and a half percent for this year again and above consensus forecast. Not by as much as the last couple of years, when I think people were really unreasonably pessimistic about recession. But I'm still a bit more upbeat. But at the same time, I think inflation

Do you First of all, I want to point out that we did see a turnaround in the s and P five hundred, So we were looking at gains, now we're looking at losses.

It's only a couple basis points in.

Videos down almost three percent, and videos flipped as well.

That is huge, And I can't imagine how Jolts drives in video down three percent, But maybe I'll figure out a way to how to make that connection.

I'm wondering about your.

Take on the FED because you expect, I think, still three rate cuts this year, and I don't understand exactly why the FED needs to cut.

Rates don't seem very restrictive.

We have three to two and a half percent growth I think is your forecast for twenty twenty five.

We have an S and P five hundred.

That's up another twenty four percent after a twenty four percent gain. Unemployment is very low, still much lower than the historical average.

Why does the FED need to continue.

To cut I'd say two things. One, the funds rate is still quite high. That I mean, we're still one hundred basis points or so above many people's estimates of the equilibrium funds rate, or we're in our case, seventy five basis points. It's a little more than one hundred basis points. In the Fed's case. So I think there's a presumption that if nothing else happens, the funds rate's more likely to come down just to get back to something closer to equilibrium, at least as long as inflation

So, just to clarify quickly, so three rate cuts in twenty twenty five that would be normalizing. It wouldn't necessarily be easy from the Federal Reserve.

Yeah, I mean that's the question of terminology, but I think you could put it that way, that it's normalizing rather than really easing.

Okay, so maybe a distinction without difference. But words matter here, Yan, And we haven't talked about Donald Trump yet, and it feels like when you talk about the FED, when you talk about the inflationary outlook, even when you talk about growth, you have to talk about tariffs. What is your base case for tariffs right now? And I know it's hard before the man even gets into the office, but what are you expecting there?

We're building in tariffs on China, so a twenty percentage point increase on average in US tariff rates on China, and we're build building in auto tariffs on the European Union and Mexico beyond that, and that gives us a modest negative impulse to growth, I mean in its by itself. There are some other changes in policy that are more growth positive, but a few tenths of of growth. And we have about three or four tenths of additional inflation in two thousand and twenty five because of the tariffs.

With that, we still have.

Inflation coming down from two point eight percent now to two point four percent by the end of the year, but we'd be very close to two percent if it wasn't for the tariff impact, so it's a sort of mixed impact. I think markets have very much focused on the fact that you know, you probably will see somewhat more inflation in the short term. They've taken that as quite hawkish, but it's double sided. I mean, you have it on the one hand, you have an inflationary impact.

I would also say, we were talking about all the data that's coming out this morning, won't put you too much on this bed. I know you're right in front of us, but I want to point out that the IT services prices paid has also been rising, and that's also leading a lot of this movement in the yields as well. You're also seeing traders wipe out the possibility of a full FED rate cut before July. So tremendous spread in the market right now and tremendous uncertainty when

I think the quantitative tightening or the normalization of the balance sheet. I mean, the idea is to have that very much in the background. It's not an active instrument of monetary policy. I don't think it's had a major impact. They're being very very careful. They might, you know, still let it run for quite a while, but at a very very slow pace. They don't want to cause any dysfunction in the markets, you know. I think the key

Moved too much.

They were way too aggressive on pricing rate cuts back in September. But now I think there's some room for pricing more.

Interesting, so maybe the market overshot in both directions. I want to stay on the long end of the treasury curve because it's just fascinating to see the long end rise even as you have the Fed cutting rates. You know, we talked a little bit about QT here, but how would you explain the rise that we've seen in the tenure treasure yield one hundred basis points since the Fed cut rates?

What's actually going on there?

Would you say?

I think it's a combination of two things. One, and maybe most importantly is what I just talked about, namely that markets have really revised their expectations of where the funds rate.

Goes, even the long end.

Well, that has an impact. Of course, the if markets think now that you know the funds rate is going to be at four percent rather than two seventy, of course that gets incorporated into the first several years of the of the term structure. So you're going to have to have an impact on the long end. And then I think number two, the charm premium is rising. This is the excess return that investors kind of expect for holding ten year securities as opposed to overnight, and that's

This could be a more secular trend.

Where as the deptter GDP ratio continues to rise, you get a little bit of additional charm premium that creeps in.

I was listening to your Odd Lots podcast with David Costin, which I thought was really great. And you're the chief economist and you're also the head of the research globally at Goldman Sachs. You seem though to focus more on the markets in the shorter term.

And I'm wondering, at least in that podcast, and I'm.

Wondering, if you step back and look at the world, what's happening in We were just talking about France, how the Populist party is the most powerful there. You just saw kickle get a pathway to lead Austria in the first far right wing government there since the Second World War. The AfD is very popular in Germany. We have Trump coming back here. What does this populous shift due to your economic outlook for global growth.

I think broadly speaking, it increases the you know, the potential risks around any baseline scenario that's more driven by the economic fundamentals themselves. I think there is more risk of you know, exogronous shocks from fiscal policy and from trade policy, just from conflict between countries, whether that's in the trade arena between countries that are you know, military and geostrategic allies, or more significant military conflict in other cases.

What about internal politics?

And I've got to say, ye, from tariffs to politics, we could go anywhere with you, but I do want you to away in one.

Of the larger stories of today.

You had Michael Barr stepping down as the vice chair for the supervisions for the Federal Reserve. You have a lot of chatter around Mickey Bowman around taking that spot. What does that mean in terms of the composition of the Federal Reserve. You have one of the largest hawks on the Federal Reserve being put up for a different type of position. She has been very critical, let's say, of some of the bank regulations. What does this mean for the impetus to raise interest rates?

Although it's not unrelated, it's not unrelated to my question right because we were talking about Jason Furman's tweet. This is sort of bowing to populist the next populist government, and.

You're getting concerned for sure.

I mean for monetary policy. I don't think it's going to have a very significant impact in the sense that, you know, the Board of Governors is fully staffed. Michael Bauer has said that he is going to remain a governor, so you know, clearly Bowman has been more hawkish on monetary policy. I'm sure that's going to continue to be the case. The read across from that into what happens on the regulatory and supervisory front I think is going

All right, Yan, Unfortunately we have to leave it. They're a real masterclass. Hope you come back soon. That is Jan Hatzius of Goldman Sachs