Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: We're going to bring Jan Hatis, of course, he's chief
Speaker 2: economists at Goldman Sachs. When you think about the balance
Speaker 2: of risks right now, we've had strong economic data keep
Speaker 2: coming through the pipe for the last couple of weeks.
Speaker 1: Are you more concerned about jobs or inflation?
Speaker 3: I'm pretty optimistic on both. I think we're set up
Speaker 3: probably for another year of pretty strong growth. I mean,
Speaker 3: we're at two and a half percent for this year
Speaker 3: again and above consensus forecast. Not by as much as
Speaker 3: the last couple of years, when I think people were
Speaker 3: really unreasonably pessimistic about recession. But I'm still a bit
Speaker 3: more upbeat. But at the same time, I think inflation
Speaker 3: can come down and can continue to come down. While
Speaker 3: the droughts number this morning is a little stronger, we've
Speaker 3: clearly seen a rebalancing in the labor market, andation is
Speaker 3: a bit lower than it was back in twenty eighteen
Speaker 3: or twenty and nineteen. So that's a that's a pretty
Speaker 3: constructive environment both of growth and on inflation, in my view.
Speaker 4: Do you First of all, I want to point out
Speaker 4: that we did see a turnaround in the s and
Speaker 4: P five hundred, So we were looking at gains, now
Speaker 4: we're looking at losses.
Speaker 5: It's only a couple basis points in.
Speaker 6: Videos down almost three percent, and videos flipped as well.
Speaker 4: That is huge, And I can't imagine how Jolts drives
Speaker 4: in video down three percent, But maybe I'll figure out
Speaker 4: a way to how to make that connection.
Speaker 5: I'm wondering about your.
Speaker 4: Take on the FED because you expect, I think, still
Speaker 4: three rate cuts this year, and I don't understand exactly
Speaker 4: why the FED needs to cut.
Speaker 5: Rates don't seem very restrictive.
Speaker 4: We have three to two and a half percent growth
Speaker 4: I think is your forecast for twenty twenty five.
Speaker 5: We have an S and P five hundred.
Speaker 4: That's up another twenty four percent after a twenty four
Speaker 4: percent gain. Unemployment is very low, still much lower than
Speaker 4: the historical average.
Speaker 5: Why does the FED need to continue.
Speaker 3: To cut I'd say two things. One, the funds rate
Speaker 3: is still quite high. That I mean, we're still one
Speaker 3: hundred basis points or so above many people's estimates of
Speaker 3: the equilibrium funds rate, or we're in our case, seventy
Speaker 3: five basis points. It's a little more than one hundred
Speaker 3: basis points. In the Fed's case. So I think there's
Speaker 3: a presumption that if nothing else happens, the funds rate's
Speaker 3: more likely to come down just to get back to
Speaker 3: something closer to equilibrium, at least as long as inflation
Speaker 3: still trends down, which is our expectation. And number two,
Speaker 3: we have seen a labor market rebalancing and in fact
Speaker 3: some signs of weaker labor market activity, certainly on the
Speaker 3: hiring front. We're also looking for a somewhat softer employment
Speaker 3: number on Friday. Obviously that's only one report, we'll see
Speaker 3: what it prints. We're at one twenty five for payrolls,
Speaker 3: and we think that the unemployment rate might edge up
Speaker 3: to four point three percent, right, and you know, four
Speaker 3: point three is low, but it's not super low. It's
Speaker 3: no longer in the three and a half percent range,
Speaker 3: and it would be a touch above the Fed's estimate
Speaker 3: of the natural rate of unemployment.
Speaker 6: So, just to clarify quickly, so three rate cuts in
Speaker 6: twenty twenty five that would be normalizing. It wouldn't necessarily
Speaker 6: be easy from the Federal Reserve.
Speaker 3: Yeah, I mean that's the question of terminology, but I
Speaker 3: think you could put it that way, that it's normalizing
Speaker 3: rather than really easing.
Speaker 6: Okay, so maybe a distinction without difference. But words matter here, Yan,
Speaker 6: And we haven't talked about Donald Trump yet, and it
Speaker 6: feels like when you talk about the FED, when you
Speaker 6: talk about the inflationary outlook, even when you talk about growth,
Speaker 6: you have to talk about tariffs. What is your base
Speaker 6: case for tariffs right now? And I know it's hard
Speaker 6: before the man even gets into the office, but what
Speaker 6: are you expecting there?
Speaker 3: We're building in tariffs on China, so a twenty percentage
Speaker 3: point increase on average in US tariff rates on China,
Speaker 3: and we're build building in auto tariffs on the European
Speaker 3: Union and Mexico beyond that, and that gives us a
Speaker 3: modest negative impulse to growth, I mean in its by itself.
Speaker 3: There are some other changes in policy that are more
Speaker 3: growth positive, but a few tenths of of growth. And
Speaker 3: we have about three or four tenths of additional inflation
Speaker 3: in two thousand and twenty five because of the tariffs.
Speaker 1: With that, we still have.
Speaker 3: Inflation coming down from two point eight percent now to
Speaker 3: two point four percent by the end of the year,
Speaker 3: but we'd be very close to two percent if it
Speaker 3: wasn't for the tariff impact, so it's a sort of
Speaker 3: mixed impact. I think markets have very much focused on
Speaker 3: the fact that you know, you probably will see somewhat
Speaker 3: more inflation in the short term. They've taken that as
Speaker 3: quite hawkish, but it's double sided. I mean, you have
Speaker 3: it on the one hand, you have an inflationary impact.
Speaker 3: On the other hand, there are also some risks to
Speaker 3: markets if we were to see a more aggressive tariff posture,
Speaker 3: which of course is a risk we don't know. As
Speaker 3: you said.
Speaker 2: I would also say, we were talking about all the
Speaker 2: data that's coming out this morning, won't put you too
Speaker 2: much on this bed. I know you're right in front
Speaker 2: of us, but I want to point out that the
Speaker 2: IT services prices paid has also been rising, and that's
Speaker 2: also leading a lot of this movement in the yields
Speaker 2: as well. You're also seeing traders wipe out the possibility
Speaker 2: of a full FED rate cut before July. So tremendous
Speaker 2: spread in the market right now and tremendous uncertainty when
Speaker 2: you look forward. I think something that is confusing about
Speaker 2: the longer end of the curve, not even the bottom end,
Speaker 2: is when you're thinking about how the FED doesn't just
Speaker 2: treat the FED funds pricing, but the longer end of
Speaker 2: the curve, quantitative tightening running off the treasure re portfolio.
Speaker 2: How is that going to change the dynamics? Because you
Speaker 2: do risk, don't you a tantrum?
Speaker 3: I think the quantitative tightening or the normalization of the
Speaker 3: balance sheet. I mean, the idea is to have that
Speaker 3: very much in the background. It's not an active instrument
Speaker 3: of monetary policy. I don't think it's had a major impact.
Speaker 3: They're being very very careful. They might, you know, still
Speaker 3: let it run for quite a while, but at a
Speaker 3: very very slow pace. They don't want to cause any
Speaker 3: dysfunction in the markets, you know. I think the key
Speaker 3: instrument is still going to be the funds rate. And
Speaker 3: on the funds rate, you're right, markets have really moved
Speaker 3: pretty far away from additional easing normalizational cuts. I mean,
Speaker 3: back in September, markets were pricing a terminal federal funds
Speaker 3: rate of two seventy. Now we're more than one hundred
Speaker 3: basis points above that in terms of market pricing. And
Speaker 3: I think markets have.
Speaker 5: Moved too much.
Speaker 3: They were way too aggressive on pricing rate cuts back
Speaker 3: in September. But now I think there's some room for
Speaker 3: pricing more.
Speaker 6: Interesting, so maybe the market overshot in both directions. I
Speaker 6: want to stay on the long end of the treasury
Speaker 6: curve because it's just fascinating to see the long end
Speaker 6: rise even as you have the Fed cutting rates. You know,
Speaker 6: we talked a little bit about QT here, but how
Speaker 6: would you explain the rise that we've seen in the
Speaker 6: tenure treasure yield one hundred basis points since the Fed
Speaker 6: cut rates?
Speaker 5: What's actually going on there?
Speaker 1: Would you say?
Speaker 3: I think it's a combination of two things. One, and
Speaker 3: maybe most importantly is what I just talked about, namely
Speaker 3: that markets have really revised their expectations of where the
Speaker 3: funds rate.
Speaker 5: Goes, even the long end.
Speaker 3: Well, that has an impact. Of course, the if markets
Speaker 3: think now that you know the funds rate is going
Speaker 3: to be at four percent rather than two seventy, of
Speaker 3: course that gets incorporated into the first several years of
Speaker 3: the of the term structure. So you're going to have
Speaker 3: to have an impact on the long end. And then
Speaker 3: I think number two, the charm premium is rising. This
Speaker 3: is the excess return that investors kind of expect for
Speaker 3: holding ten year securities as opposed to overnight, and that's
Speaker 3: been rising for I think a variety of reasons. Concerns
Speaker 3: around fiscal policy are certainly part of that, and you know,
Speaker 3: I think that's been a trend that we have been
Speaker 3: seeing and may continue to see.
Speaker 5: This could be a more secular trend.
Speaker 3: Where as the deptter GDP ratio continues to rise, you
Speaker 3: get a little bit of additional charm premium that creeps in.
Speaker 4: I was listening to your Odd Lots podcast with David Costin,
Speaker 4: which I thought was really great. And you're the chief
Speaker 4: economist and you're also the head of the research globally
Speaker 4: at Goldman Sachs. You seem though to focus more on
Speaker 4: the markets in the shorter term.
Speaker 5: And I'm wondering, at least in that podcast, and I'm.
Speaker 4: Wondering, if you step back and look at the world,
Speaker 4: what's happening in We were just talking about France, how
Speaker 4: the Populist party is the most powerful there. You just
Speaker 4: saw kickle get a pathway to lead Austria in the
Speaker 4: first far right wing government there since the Second World War.
Speaker 4: The AfD is very popular in Germany. We have Trump
Speaker 4: coming back here. What does this populous shift due to
Speaker 4: your economic outlook for global growth.
Speaker 3: I think broadly speaking, it increases the you know, the
Speaker 3: potential risks around any baseline scenario that's more driven by
Speaker 3: the economic fundamentals themselves. I think there is more risk
Speaker 3: of you know, exogronous shocks from fiscal policy and from
Speaker 3: trade policy, just from conflict between countries, whether that's in
Speaker 3: the trade arena between countries that are you know, military
Speaker 3: and geostrategic allies, or more significant military conflict in other cases.
Speaker 3: And obviously there are a number of examples of this.
Speaker 3: So if I look back over the twenty seven twenty
Speaker 3: eight years that I've been an economist working in markets,
Speaker 3: I put a lot more weight on these exulgentius shocks
Speaker 3: now than I did when I started my career. You
Speaker 3: know what about and you know, there are many many
Speaker 3: different aspects of that. I think a lot of the
Speaker 3: populist backlash in Europe that we're seeing now is certainly
Speaker 3: an aspect of that. But this is a conversation that
Speaker 3: could go on for a long time.
Speaker 1: What about internal politics?
Speaker 2: And I've got to say, ye, from tariffs to politics,
Speaker 2: we could go anywhere with you, but I do want
Speaker 2: you to away in one.
Speaker 1: Of the larger stories of today.
Speaker 2: You had Michael Barr stepping down as the vice chair
Speaker 2: for the supervisions for the Federal Reserve. You have a
Speaker 2: lot of chatter around Mickey Bowman around taking that spot.
Speaker 2: What does that mean in terms of the composition of
Speaker 2: the Federal Reserve. You have one of the largest hawks
Speaker 2: on the Federal Reserve being put up for a different
Speaker 2: type of position. She has been very critical, let's say,
Speaker 2: of some of the bank regulations. What does this mean
Speaker 2: for the impetus to raise interest rates?
Speaker 4: Although it's not unrelated, it's not unrelated to my question
Speaker 4: right because we were talking about Jason Furman's tweet. This
Speaker 4: is sort of bowing to populist the next populist government, and.
Speaker 1: You're getting concerned for sure.
Speaker 3: I mean for monetary policy. I don't think it's going
Speaker 3: to have a very significant impact in the sense that,
Speaker 3: you know, the Board of Governors is fully staffed. Michael
Speaker 3: Bauer has said that he is going to remain a governor,
Speaker 3: so you know, clearly Bowman has been more hawkish on
Speaker 3: monetary policy. I'm sure that's going to continue to be
Speaker 3: the case. The read across from that into what happens
Speaker 3: on the regulatory and supervisory front I think is going
Speaker 3: to be limited. Obviously, we've seen a big shift in
Speaker 3: terms of the political environment that's going to have implications
Speaker 3: for regulation, not just in the financial sphere, but probably
Speaker 3: also in other areas like mergers and maybe energy regulation.
Speaker 3: And I think this is part and parcel of that
Speaker 3: broader shift in terms of the regulatory agenda.
Speaker 6: All right, Yan, Unfortunately we have to leave it. They're
Speaker 6: a real masterclass. Hope you come back soon. That is
Speaker 6: Jan Hatzius of Goldman Sachs