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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Jan Hatzius and the team at Goldman Sachs falling in

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Speaker 2: line with the broad consensus expecting three FED rate cuts

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Speaker 2: this year. Hatsius right in this Inflation has been firmer

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Speaker 2: in recent months, but we think it is still on

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Speaker 2: track to fall enough by the June meeting for a

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Speaker 2: first cup. This has become less obvious, though, and our

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Speaker 2: inflation path for the rest of the year is now

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Speaker 2: at a range where small surprises could have large consequences.

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Speaker 2: Jan and Places says with us in the studio in

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Speaker 2: New York, Yankee Morning, Tore great to be here, fantastically

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Speaker 2: catch up with you, sir. I remember the outlook to

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Speaker 2: start this year, and we talked about it a lot

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Speaker 2: on this program. The hard part was over. It's almost

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Speaker 2: easy from here. Do you still think that's the case

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Speaker 2: based on the days we've had so far this year.

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Speaker 3: Yeah, it's more of a question because of the stronger

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Speaker 3: inflation numbers, but I think if you look at the trends,

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Speaker 3: we're still on track to get down to the two

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Speaker 3: point four percent range also for core piece inflation by

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Speaker 3: the fourth quarter, and now at the start of the year,

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Speaker 3: we thought that was going to be two point two percent,

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Speaker 3: so that's been a little bit higher. We've basically gone

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Speaker 3: back to the forecast that we had last fall. But

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Speaker 3: two point four percent is still pretty good progress, and

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Speaker 3: by twenty twenty five, I think will be at two.

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Speaker 3: If you look at the drivers of inflation, whether it's

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Speaker 3: on the good side or on the rent side, or

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Speaker 3: in the labor market, I think the trends there still

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Speaker 3: look encouraging. But of course the prints have been higher,

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Speaker 3: so there's more of a debate about it, and the

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Speaker 3: FED is going to be responsive to kind of near

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Speaker 3: drumson prizes.

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Speaker 2: Well, let's talk about how responsive they might be today.

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Speaker 2: As we know, clear and obvious risk factor is in

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Speaker 2: the dot plot, whether that medium dots shifts from three

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Speaker 2: cuts stay to two and as we all know, it

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Speaker 2: only takes two officials to move in that direction. Do

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Speaker 2: you think that's something that happens today. Is that a

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Speaker 2: base case in today's meeting?

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Speaker 3: It's not a base case for me, but it certainly

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Speaker 3: is a possibility because not that much has to change

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Speaker 3: in terms of the projections. If you go back to

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Speaker 3: two weeks ago when Chair Powell testified in Congress, he

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Speaker 3: said they were pretty close to having enough confidence, So

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Speaker 3: that sounded like, you know, a cut no later than

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Speaker 3: June if you take the statements there. We've had higher

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Speaker 3: inflation numbers in the past week, So all the question

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Speaker 3: is has that changed his view? My expectation is null,

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Speaker 3: but we'll find out two PM.

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Speaker 1: All things being equal, it seems to have changed your

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Speaker 1: view on the margins. You shifted down to three rate

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Speaker 1: cuts expected for this year from four earlier in a

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Speaker 1: report in the past couple of weeks, and you'd said

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Speaker 1: this line that John noted small surprises could have large consequences.

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Speaker 3: What do you mean, Well, if you have a few

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Speaker 3: additional tenths of inflation by the end of the year,

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Speaker 3: even if it doesn't really change the overall trend, twenty

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Speaker 3: twenty four is still lower than twenty twenty three, but

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Speaker 3: they would deliver less cuts in that sense. Yeah, I

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Speaker 3: think it'd be a continuation of what we've seen in

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Speaker 3: the last several months, where in the early part of

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Speaker 3: the year, with an expectation of inflation coming down to

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Speaker 3: very close to two, you know, I think they would

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Speaker 3: have done more. But now it seems like the December

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Speaker 3: dot plot and the December inflation forecast looks pretty reasonable

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Speaker 3: to us.

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Speaker 1: It seems like people are split on their views based

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Speaker 1: on whether they think that the neutral rate has shifted

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Speaker 1: materially or not. You believe that the neutral rate is

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Speaker 1: still going to be around your previous projections at three

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Speaker 1: and a quarter to three and a half percent, How

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Speaker 1: do you push back against people who say it's actually

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Speaker 1: four percent or higher, like el Selinus of RBC Capital.

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Speaker 3: I think we don't know, and I would certainly I

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Speaker 3: wouldn't push back very hard because the confidence interval around

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Speaker 3: any of these estimates is quite high. Four percent, though,

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Speaker 3: is still well south of five and three eights, and

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Speaker 3: I I am pretty confident that at current levels we're

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Speaker 3: in restrictive territory by a significant amount. But whether the

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Speaker 3: right number you know, is four or three and a

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Speaker 3: half or three you know, that's harder to know. I

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Speaker 3: do think that the FMZ projection two and a half percent,

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Speaker 3: if you take the median, that looks pretty stale, and

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Speaker 3: I think that is going to drift up over time,

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Speaker 3: probably by a little bit. Today, although we've been waiting

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Speaker 3: for this for a while and so far it hasn't happened,

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Speaker 3: at least as far as the medium is concerned.

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Speaker 2: You're a precise man and very careful with your words

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Speaker 2: when you say we're in restrictive and significantly So what

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Speaker 2: guides that? Where does that come from?

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Speaker 3: I think all models of neutral rates, and they're all

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Speaker 3: pretty imprecise. This is not precise. There are many different models.

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Speaker 3: Each of them has a significant amount of error. But

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Speaker 3: you're going to be hard pressed finding a model that

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Speaker 3: says three percent plus on the real rate, on the

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Speaker 3: real funds rate is you know, is neutral. So it's

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Speaker 3: really guided by a variety of different models, some developed

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Speaker 3: at the FED, some developed elsewhere. That's say we're right now,

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Speaker 3: we're outside that range of uncertainty.

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Speaker 2: Can I ask you this question?

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Speaker 3: Then?

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Speaker 2: If I was a first year intern at Godman Sachs,

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Speaker 2: I'd create a model really quickly and I'd say, yeah,

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Speaker 2: unemployment stat the four percent equities of real time highs

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Speaker 2: and credit spreads are super tight. Why is that a

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Speaker 2: band model to sit here and say that maybe we're

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Speaker 2: not that restrictive at all.

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Speaker 3: Well, in the so this kind of short run and

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Speaker 3: long run, So I don't think that the current level

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Speaker 3: is very problematic in terms of mere term growth and

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Speaker 3: as you know, all forecasts on growth is well above

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Speaker 3: the consensus, and you know continues to be. But over time,

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Speaker 3: once the kind of short term moves in financial conditions,

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Speaker 3: short term move in fiscal policy, and other forces play

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Speaker 3: themselves out, I think it's pretty clear that the current

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Speaker 3: level is above normal kind of neutral levels. It's all

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Speaker 3: over the medium charm. It's very likely that we will

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Speaker 3: see declines and rates, but the time path is going

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Speaker 3: to be guided by the data.

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Speaker 1: So you don't think it'll be important for j. Powell

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Speaker 1: to push back against some of the record highs on

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Speaker 1: stocks and some of the tightening and credit spreads.

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Speaker 3: Well, you would never comment on you know, near to

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Speaker 3: our market moves, of course.

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Speaker 2: So you say that. But actually I remember that meeting

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Speaker 2: where that journalist and it was an honest mistake, said

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Speaker 2: to Pow that markets were rallying, and I remember his

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Speaker 2: response to it in the news conference, and we will

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Speaker 2: talk to I think it was Jim Pianco Pianca Research

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Speaker 2: that called it Powe's hawkish hits. He just came out

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Speaker 2: and the hawkish tone that he used once he thought

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Speaker 2: that markets were going against what the Federal Reserve was

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Speaker 2: trying to guide them, to. I think it was pretty stark, strong,

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Speaker 2: maybe profound. Why isn't that an option he could take today,

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Speaker 2: in the face of CPR is coming in pretty hot,

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Speaker 2: We've taken out cuts in this markets off to the racist.

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Speaker 2: Why wouldn't that be something he'd be concerned by.

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Speaker 3: I don't think it's a problem because he's not. I

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Speaker 3: don't think he's trying to slow things slow things down significantly.

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Speaker 3: I mean, the unemployment rate has drifted up somewhat. You know,

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Speaker 3: we're still seeing rebalancing in job openings, the quits rate

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Speaker 3: is coming down, inflation is going down. The Yeah, the

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Speaker 3: sequential numbers have been a little higher, but the year

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Speaker 3: on year rate has continued to come down. I don't

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Speaker 3: think he's going to be particularly worried about having to

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Speaker 3: squeeze the economy. He can respond to surprise us by

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Speaker 3: delivering cuts a little bit later, delivering cuts a little

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Speaker 3: bit earlier. But I don't think he's He's in a

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Speaker 3: very different situation from where we were. You know, a

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Speaker 3: year ago, certain.

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Speaker 2: Changes identified two and it's implicit in your forecast. And

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Speaker 2: you're right to point out that your growth forecasts have

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Speaker 2: been above the street ever since you came out with

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Speaker 2: your Roundlook, strong growth doesn't appear to be a problem

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Speaker 2: to the Federal Reserve. Why is that? What is different

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Speaker 2: about this moment?

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Speaker 3: Well, because I think inflation is much lower and it's

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Speaker 3: heading down, and the year on year rate is still

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Speaker 3: heading down. The labor market is much closer to balance,

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Speaker 3: so the inflation expectations have continued to come down. They've

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Speaker 3: now largely normalized. So all the things that Fed officials

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Speaker 3: will were very worried about a year and a half ago,

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Speaker 3: that you'd get un anchoring of inflation expectations, you'd get

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Speaker 3: a wage price spiral. I think a lot of those

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Speaker 3: things have moved into the rearview mirror, and so therefore

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Speaker 3: they are much less concerned about easier financial conditions. They'll

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Speaker 3: still be relevant for setting policy, but they're going to

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Speaker 3: be much less of a concern than maybe in this

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Speaker 3: episode that you mentioned.

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Speaker 2: Yea, and this was great. It's always fantastic to catch up.

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Speaker 2: So it's been too long. It's good to see you.

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Speaker 2: Thank you, Jans. Is there of Goldman Sex