WEBVTT - Goldman Sachs Chief Economist Jan Hatzius Talks Inflation

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Joining us now for more Goldman Sachs chief economist Jan Hatzias.

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<v Speaker 2>You know, you have IMF for the US alone, reducing

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<v Speaker 2>growth and increasing inflation expectations. You have the President of

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<v Speaker 2>the United States really pushing the Federal Reserve to cut

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<v Speaker 2>interest rates and threatening here J Powell's job. Do you

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<v Speaker 2>think the Fed does in case in fact have room

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<v Speaker 2>to cut interest rates? Is there a case for that

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<v Speaker 2>to happen given the inflation concerns.

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<v Speaker 3>It's complicated because clearly the growth outlook has the terior

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<v Speaker 3>rate it very significantly on the back of these tariff

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

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<v Speaker 3>We're looking for only really barely positive growth in two

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<v Speaker 3>thousand and twenty five zero point five percent fourth quarter

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<v Speaker 3>to fourth quarter. But at the same time, the inflation

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<v Speaker 3>outlooks also deteriorated, and we're probably going to get back

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<v Speaker 3>to the mid threes, if not higher for core inflation.

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<v Speaker 3>So I think the FED is going to probably take

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<v Speaker 3>away to see attitude at least for the next meeting,

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<v Speaker 3>because I think at this point it's unclear what is

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<v Speaker 3>going to win out, what are the drivers of the

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<v Speaker 3>ultimate decision. I think number one, do we see a

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<v Speaker 3>significant deterioration in the labor market a significant increase in

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<v Speaker 3>unemployment that would make cuts a lot more likely. And

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<v Speaker 3>then number two, what do we learn about inflation expectations?

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<v Speaker 3>Do they stay anchored? And I think if you see

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<v Speaker 3>deterioration in the labor market and pretty good inflation expectations numbers,

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<v Speaker 3>then I would expect some cuts before too long. We

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<v Speaker 3>have three the three cuts twenty five basis points in June, July, September,

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<v Speaker 3>but that's going to really depend on the economic data.

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<v Speaker 1>Right, So there could be a case for cuts, but

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<v Speaker 1>it sounds like it doesn't quite exist yet. I want

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<v Speaker 1>to get your thoughts on on another story that's been

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<v Speaker 1>developing over the past week or so, and that is

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<v Speaker 1>that Trump reportedly talking in private about options what it

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<v Speaker 1>would look like if he could removed your own pal

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<v Speaker 1>from Federal Reserve chairmanship. And I'm curious what you think

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<v Speaker 1>that the reactions specifically in the Treasury market would look

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<v Speaker 1>like were that to happen.

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<v Speaker 3>Well, I think we've seen it in the last couple

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<v Speaker 3>of weeks when that has come up last week and

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<v Speaker 3>then again over the weekend and yesterday we have seen

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<v Speaker 3>significant tightening and financial conditions with increases in bond yields

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<v Speaker 3>and declines and inequity prices, and also weakness in the DORA.

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<v Speaker 3>But for net net it has tightened our financial conditions

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<v Speaker 3>index whenever that has come up, and so I think

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<v Speaker 3>gives you sort of a foretaste of what would happen

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<v Speaker 3>if we really did go down this road. There are

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<v Speaker 3>a lot of legal issues around this, and I'm of

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<v Speaker 3>course not a lawyer, so I don't know what the

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<v Speaker 3>ultimate adjudication would be, but it is it is clearly

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<v Speaker 3>something that has had a significant impact on financial markets.

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<v Speaker 4>I want to ask you about Torsten Slock's forecast ninety

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<v Speaker 4>percent chances of what he calls a VTR are a

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<v Speaker 4>virtual trade reset recession. He notes that eighty percent of

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<v Speaker 4>US employment, eighty five percent of CAPEX comes from small

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<v Speaker 4>businesses and they have a much tougher time dealing with

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<v Speaker 4>these tariffs. He says, expectancye ships it off shore, orders canceled,

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

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<v Speaker 4>you as concerned as Apollo's economist.

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<v Speaker 3>Well, ninety percent is a very confident view on almost

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<v Speaker 3>any outcome. I don't know if that refers to the

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<v Speaker 3>standard definition of a recession, which is really the National

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<v Speaker 3>Bureau of Economic Research determination on that basis, We're at

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<v Speaker 3>forty five percent for the next twelve months, which is

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<v Speaker 3>definitely a high risk of recession. It's practically a toss up.

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<v Speaker 3>But I think the questions at the moment are, do

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<v Speaker 3>we see a weakening of the hard data that is

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<v Speaker 3>similar to what we've seen in the in the soft data,

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<v Speaker 3>what's going to happen to the average care rate? And

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<v Speaker 3>I think the pullback that we saw on April ninth

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<v Speaker 3>does give us more of a chance of avoiding recession.

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<v Speaker 3>And how big of a tightening in financial conditions do

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<v Speaker 3>we see? There was a very rapid tightening between April

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<v Speaker 3>second and April ninth. Some of that has unwound, so

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<v Speaker 3>it's it's definitely a significant growth drag. But whether it's

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

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<v Speaker 4>And I just to double down on Shanali's first question,

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<v Speaker 4>then why doesn't jerme power cut rates? Now? If the

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<v Speaker 4>soft data looks this bad, don't you want to stop

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<v Speaker 4>it from solidifying into really bad hard data. Wouldn't a

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<v Speaker 4>rate cut, a pre eminent rate cut now be the

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<v Speaker 4>right move from the Fed?

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<v Speaker 3>That would be the argument in favor of a rate cut.

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<v Speaker 3>The argument against would be that you also wouldn't want

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<v Speaker 3>the very likely increase in inflation to harden into second

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<v Speaker 3>round effects and ongoing higher inflation. That's that's the other

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<v Speaker 3>side of the mandate. And I think at this point

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<v Speaker 3>the FED is not going to be preemptive, but probably

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<v Speaker 3>more reactive because they need answers to those questions.

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<v Speaker 2>Yeah, and we were speaking just a day ago to

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<v Speaker 2>Claudia sam And one point you seem to make here

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<v Speaker 2>was that if the FED does cut interest rates here

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<v Speaker 2>does it look like political pressure. The issue that might

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<v Speaker 2>be being created right now with the President's pressure on

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<v Speaker 2>the Federal Reserve is politicization of the FED. Therefore the

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<v Speaker 2>Fed's credibility. Do you think that this has the potential

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<v Speaker 2>to create some crisis of confidence frankly in an institution

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<v Speaker 2>that has been the backstop of this market for now,

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<v Speaker 2>you could argue the better part of a decade at least.

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<v Speaker 3>Well, it certainly raises risks. I think the way to

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<v Speaker 3>address those risks if you're sitting in the FMC is

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<v Speaker 3>to really be very clear that they're focused on the

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<v Speaker 3>data and take into account what's happening in terms of

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<v Speaker 3>the growth outlook and the labor market, but also look

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<v Speaker 3>at the inflation outlook. I think, I mean, you don't

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<v Speaker 3>want to cut because of political pressure, but at the

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

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<v Speaker 3>If the way that the outlook breaks is that we see,

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<v Speaker 3>you know, a any significant deterioration in the labor market,

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<v Speaker 3>then I think they should respond to that, and I

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<v Speaker 3>think they will respond to that.

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<v Speaker 1>Let's talk a little bit more about FED independence, because

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<v Speaker 1>let's say that Jerome Pal stays on for the full

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<v Speaker 1>length of his term May twenty twenty six. But the

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

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<v Speaker 1>political pressure exists even if Trump doesn't take the ultimate

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<v Speaker 1>step of removing Jerome Pal. And I wonder when we

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<v Speaker 1>get that next Trump appointee to run the Federal Reserve,

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<v Speaker 1>what does it look like when you think about the

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<v Speaker 1>board holistically, is it possible that we see more dysfunction,

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<v Speaker 1>more dessense when you think about the future of the FED.

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

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<v Speaker 3>actually quite normal to disagree, and we've had the sense

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<v Speaker 3>over the years, and if you look at other central

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<v Speaker 3>banks outside the US, it's actually much more common to

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

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

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<v Speaker 3>we of course have to look at how the board

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<v Speaker 3>of governors evolves, and of course there's also the reserve

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<v Speaker 3>bank presidents. The FOMEC is seven governors and at any

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<v Speaker 3>time five reserve bank presidents. So it is an institution

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<v Speaker 3>that has, you know, quite a lot of institutional stability,

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<v Speaker 3>even in an environment where the president gets to appoint

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<v Speaker 3>a new chair and new governors, but it takes quite

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<v Speaker 3>a long time. So I think there is you know,

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<v Speaker 3>there are some significant safeguards built into the system, and

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<v Speaker 3>I certainly don't worry about the sense very much.

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<v Speaker 2>Yeah, and I spent a lot of my time I

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<v Speaker 2>started my career covering investment banks here, so the structuring

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<v Speaker 2>advisors are the ones that I'm calling the most these days.

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<v Speaker 2>As an economist, how do you see the economy weakening?

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<v Speaker 2>Where are you sharpening your pencils the most to see

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<v Speaker 2>that fall off? The cliff that we're standing on well.

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<v Speaker 3>In terms of sectors of the economy, I think you

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<v Speaker 3>want to look at number one, what's happening to consumer

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<v Speaker 3>spending as real incomes decline, you know, as prices rise

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<v Speaker 3>and that eats into real income on the back of

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<v Speaker 3>the tariffs. I think that's going to happen over the

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<v Speaker 3>next few months. And then number two, business investment. I

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

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<v Speaker 3>the potential for firms to just wait it out until

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<v Speaker 3>they have more clarity, So high frequency capital spending indicators

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<v Speaker 3>are going to be helpful as well. I think there

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<v Speaker 3>you probably do want to focus pretty closely on surveys

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<v Speaker 3>of capital spending intentions because the hard data are very

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<v Speaker 3>lagged and you're not going to learn in time what's

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<v Speaker 3>going on. But I think those are really the two

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<v Speaker 3>areas that are probably most important. Obviously, the trade data

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<v Speaker 3>are going to be important, but they're going to be

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<v Speaker 3>enormously volatile because of pull forward effects and then changes

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

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<v Speaker 3>Gen Kapix