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

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Speaker 2: Joining us now for more Goldman Sachs chief economist Jan Hatzias.

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Speaker 2: You know, you have IMF for the US alone, reducing

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Speaker 2: growth and increasing inflation expectations. You have the President of

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Speaker 2: the United States really pushing the Federal Reserve to cut

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Speaker 2: interest rates and threatening here J Powell's job. Do you

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Speaker 2: think the Fed does in case in fact have room

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Speaker 2: to cut interest rates? Is there a case for that

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Speaker 2: to happen given the inflation concerns.

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Speaker 3: It's complicated because clearly the growth outlook has the terior

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Speaker 3: rate it very significantly on the back of these tariff

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Speaker 3: announcementths and we've downgraded it by more than the IMF has.

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Speaker 3: We're looking for only really barely positive growth in two

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Speaker 3: thousand and twenty five zero point five percent fourth quarter

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Speaker 3: to fourth quarter. But at the same time, the inflation

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Speaker 3: outlooks also deteriorated, and we're probably going to get back

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Speaker 3: to the mid threes, if not higher for core inflation.

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Speaker 3: So I think the FED is going to probably take

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Speaker 3: away to see attitude at least for the next meeting,

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Speaker 3: because I think at this point it's unclear what is

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Speaker 3: going to win out, what are the drivers of the

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Speaker 3: ultimate decision. I think number one, do we see a

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Speaker 3: significant deterioration in the labor market a significant increase in

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Speaker 3: unemployment that would make cuts a lot more likely. And

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Speaker 3: then number two, what do we learn about inflation expectations?

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Speaker 3: Do they stay anchored? And I think if you see

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Speaker 3: deterioration in the labor market and pretty good inflation expectations numbers,

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Speaker 3: then I would expect some cuts before too long. We

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Speaker 3: have three the three cuts twenty five basis points in June, July, September,

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Speaker 3: but that's going to really depend on the economic data.

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Speaker 1: Right, So there could be a case for cuts, but

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Speaker 1: it sounds like it doesn't quite exist yet. I want

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Speaker 1: to get your thoughts on on another story that's been

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Speaker 1: developing over the past week or so, and that is

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Speaker 1: that Trump reportedly talking in private about options what it

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Speaker 1: would look like if he could removed your own pal

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Speaker 1: from Federal Reserve chairmanship. And I'm curious what you think

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Speaker 1: that the reactions specifically in the Treasury market would look

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Speaker 1: like were that to happen.

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Speaker 3: Well, I think we've seen it in the last couple

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Speaker 3: of weeks when that has come up last week and

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Speaker 3: then again over the weekend and yesterday we have seen

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Speaker 3: significant tightening and financial conditions with increases in bond yields

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Speaker 3: and declines and inequity prices, and also weakness in the DORA.

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Speaker 3: But for net net it has tightened our financial conditions

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Speaker 3: index whenever that has come up, and so I think

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Speaker 3: gives you sort of a foretaste of what would happen

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Speaker 3: if we really did go down this road. There are

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Speaker 3: a lot of legal issues around this, and I'm of

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Speaker 3: course not a lawyer, so I don't know what the

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Speaker 3: ultimate adjudication would be, but it is it is clearly

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Speaker 3: something that has had a significant impact on financial markets.

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Speaker 4: I want to ask you about Torsten Slock's forecast ninety

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Speaker 4: percent chances of what he calls a VTR are a

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Speaker 4: virtual trade reset recession. He notes that eighty percent of

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Speaker 4: US employment, eighty five percent of CAPEX comes from small

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Speaker 4: businesses and they have a much tougher time dealing with

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Speaker 4: these tariffs. He says, expectancye ships it off shore, orders canceled,

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Speaker 4: and well run general Retailer's file for bankruptcy. Why aren't

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Speaker 4: you as concerned as Apollo's economist.

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Speaker 3: Well, ninety percent is a very confident view on almost

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Speaker 3: any outcome. I don't know if that refers to the

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Speaker 3: standard definition of a recession, which is really the National

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Speaker 3: Bureau of Economic Research determination on that basis, We're at

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Speaker 3: forty five percent for the next twelve months, which is

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Speaker 3: definitely a high risk of recession. It's practically a toss up.

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Speaker 3: But I think the questions at the moment are, do

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Speaker 3: we see a weakening of the hard data that is

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Speaker 3: similar to what we've seen in the in the soft data,

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Speaker 3: what's going to happen to the average care rate? And

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Speaker 3: I think the pullback that we saw on April ninth

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Speaker 3: does give us more of a chance of avoiding recession.

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Speaker 3: And how big of a tightening in financial conditions do

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Speaker 3: we see? There was a very rapid tightening between April

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Speaker 3: second and April ninth. Some of that has unwound, so

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Speaker 3: it's it's definitely a significant growth drag. But whether it's

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Speaker 3: a recession, I think it's a little too early to tell.

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Speaker 4: And I just to double down on Shanali's first question,

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Speaker 4: then why doesn't jerme power cut rates? Now? If the

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Speaker 4: soft data looks this bad, don't you want to stop

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Speaker 4: it from solidifying into really bad hard data. Wouldn't a

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Speaker 4: rate cut, a pre eminent rate cut now be the

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Speaker 4: right move from the Fed?

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Speaker 3: That would be the argument in favor of a rate cut.

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Speaker 3: The argument against would be that you also wouldn't want

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Speaker 3: the very likely increase in inflation to harden into second

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Speaker 3: round effects and ongoing higher inflation. That's that's the other

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Speaker 3: side of the mandate. And I think at this point

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Speaker 3: the FED is not going to be preemptive, but probably

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Speaker 3: more reactive because they need answers to those questions.

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Speaker 2: Yeah, and we were speaking just a day ago to

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Speaker 2: Claudia sam And one point you seem to make here

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Speaker 2: was that if the FED does cut interest rates here

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Speaker 2: does it look like political pressure. The issue that might

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Speaker 2: be being created right now with the President's pressure on

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Speaker 2: the Federal Reserve is politicization of the FED. Therefore the

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Speaker 2: Fed's credibility. Do you think that this has the potential

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Speaker 2: to create some crisis of confidence frankly in an institution

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Speaker 2: that has been the backstop of this market for now,

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Speaker 2: you could argue the better part of a decade at least.

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Speaker 3: Well, it certainly raises risks. I think the way to

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Speaker 3: address those risks if you're sitting in the FMC is

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Speaker 3: to really be very clear that they're focused on the

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Speaker 3: data and take into account what's happening in terms of

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Speaker 3: the growth outlook and the labor market, but also look

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Speaker 3: at the inflation outlook. I think, I mean, you don't

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Speaker 3: want to cut because of political pressure, but at the

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Speaker 3: same time, you also don't want to refuse to recognize reality.

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Speaker 3: If the way that the outlook breaks is that we see,

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Speaker 3: you know, a any significant deterioration in the labor market,

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Speaker 3: then I think they should respond to that, and I

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Speaker 3: think they will respond to that.

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Speaker 1: Let's talk a little bit more about FED independence, because

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Speaker 1: let's say that Jerome Pal stays on for the full

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Speaker 1: length of his term May twenty twenty six. But the

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Speaker 1: genie's out of the bottle here, Yan. We know that

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Speaker 1: political pressure exists even if Trump doesn't take the ultimate

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Speaker 1: step of removing Jerome Pal. And I wonder when we

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Speaker 1: get that next Trump appointee to run the Federal Reserve,

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Speaker 1: what does it look like when you think about the

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Speaker 1: board holistically, is it possible that we see more dysfunction,

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Speaker 1: more dessense when you think about the future of the FED.

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Speaker 3: Well, I wouldn't call the sense dysfunction. I think it's

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Speaker 3: actually quite normal to disagree, and we've had the sense

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Speaker 3: over the years, and if you look at other central

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Speaker 3: banks outside the US, it's actually much more common to

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Speaker 3: have the sense, and I don't think there's anything wrong

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Speaker 3: with it, so that I don't worry about as much. Now,

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Speaker 3: we of course have to look at how the board

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Speaker 3: of governors evolves, and of course there's also the reserve

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Speaker 3: bank presidents. The FOMEC is seven governors and at any

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Speaker 3: time five reserve bank presidents. So it is an institution

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Speaker 3: that has, you know, quite a lot of institutional stability,

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Speaker 3: even in an environment where the president gets to appoint

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Speaker 3: a new chair and new governors, but it takes quite

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Speaker 3: a long time. So I think there is you know,

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Speaker 3: there are some significant safeguards built into the system, and

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Speaker 3: I certainly don't worry about the sense very much.

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Speaker 2: Yeah, and I spent a lot of my time I

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Speaker 2: started my career covering investment banks here, so the structuring

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Speaker 2: advisors are the ones that I'm calling the most these days.

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Speaker 2: As an economist, how do you see the economy weakening?

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Speaker 2: Where are you sharpening your pencils the most to see

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Speaker 2: that fall off? The cliff that we're standing on well.

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Speaker 3: In terms of sectors of the economy, I think you

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Speaker 3: want to look at number one, what's happening to consumer

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Speaker 3: spending as real incomes decline, you know, as prices rise

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Speaker 3: and that eats into real income on the back of

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Speaker 3: the tariffs. I think that's going to happen over the

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Speaker 3: next few months. And then number two, business investment. I

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Speaker 3: think you're particularly going to be focused on the uncertainty effects,

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Speaker 3: the potential for firms to just wait it out until

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Speaker 3: they have more clarity, So high frequency capital spending indicators

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Speaker 3: are going to be helpful as well. I think there

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Speaker 3: you probably do want to focus pretty closely on surveys

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Speaker 3: of capital spending intentions because the hard data are very

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Speaker 3: lagged and you're not going to learn in time what's

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Speaker 3: going on. But I think those are really the two

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Speaker 3: areas that are probably most important. Obviously, the trade data

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Speaker 3: are going to be important, but they're going to be

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Speaker 3: enormously volatile because of pull forward effects and then changes

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Speaker 3: and trade flows. But for the domestic economy, it's really consumption.

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Speaker 3: Gen Kapix