Jan Hatzius: How the Market is Moving Ahead of Trump

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Bloomberg Jan 8 23:02 · 5759 Views

Goldman Sachs Chief Economist Jan Hatzius says inflation would come down quicker if President-elect Donald Trump does not institute tariffs on all imports. Trump has promised 10% to 20% across-the-board tariffs on all imported goods. Hatzius also says he expects the Federal Reserve to cut interest rates three times this year.

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00:00 We're going to bring in Jan Hatzius, of course.
00:01 He's chief economist at Goldman Sachs.
00:04 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.
00:11 Are you more concerned about jobs or inflation?
00:15 I'm pretty optimistic on both.
00:17 I think we're set up probably for another year of pretty strong growth.
00:22 I mean, we're at 2 1/2% for this year again and above
00:26 consensus
00:27 forecast not by as much as the last couple of years when I think people were really unreasonably
00:34 pessimistic about recession.
00:36 But I I'm still a bit more upbeat.
00:38 But at the same time, I think inflation can come down
00:42 and can continue to come down.
00:44 While
00:44 the dwarves number this morning is a little stronger.
00:47 We've clearly seen
00:49 a
00:50 rebalancing in the labor market and
00:53 utilization is now a bit lower than it was back in 2018 or 2019.
00:58 So
00:59 that's a, that's a pretty constructive environment both on growth and on inflation in my view.
01:04 Do you, first of all, I want to point out that we did see a turn around in the S&P 500.
01:09 So we were looking at gains.
01:10 Now we're looking at losses.
01:11 It's only a couple basis points.
01:13 Nvidia's down almost 3%, Nvidia's flipped as well.
01:16 That is huge and I can't imagine how Jolt drives NVIDIA down 3%,
01:21 but maybe I'll figure out a way to how to make that connection.
01:25 I'm, I'm wondering about your take on the Fed because you expect I think still 3 rate cuts this year
01:32 and I don't
01:33 understand exactly why the Fed needs to cut
01:36 rates don't seem very restrictive.
01:38 We have three 2 1/2 percent growth I think is your forecast for 2025.
01:42 We have
01:43 an S&P
01:44 500 that's
01:45 up another 24% after a 24%
01:49 gain.
01:49 Unemployment is very low, still much lower than the historical average.
01:54 Why does the Fed need to continue to cut?
01:57 I'd say two things.
01:57 One, the funds rate is still quite high
02:00 that I mean we're still 100 basis points
02:03 or so above many people's estimates of
02:07 the,
02:08 you know, equilibrium funds rate or you know, we're in our case 75 basis points.
02:13 It's a little more than 100 basis points in the feds case.
02:16 So I think there's a presumption that
02:19 if nothing else happens, the funds rates more likely to come down just to get back to something closer to equilibrium, at least as long
02:26 as inflation still trends down, which is our expectation.
02:30 And #2 we have seen
02:32 a labor market rebalancing and in fact, some signs of,
02:37 you know, weaker labor market activity, certainly on the hiring front.
02:41 We're also looking for
02:43 a somewhat softer employment number on Friday.
02:45 Obviously, that's only one report.
02:47 We'll see what it prints.
02:48 We're at 1:25 for payrolls.
02:51 And we think that the unemployment rate might edge up to 4.3%.
02:56 And,
02:56 you know, 4.3 is low, but it's not super low.
03:01 It's no longer in the 3 1/2 half percent range, and it would be a touch above the Fed's estimate
03:06 of
03:07 the natural rate of unemployment.
03:08 So just to clarify quickly.
03:10 So 3 rate cuts in 2025, that would be normalizing.
03:13 It wouldn't necessarily be easing from the Federal Reserve.
03:16 Yeah, I mean, that's a question of terminology, but I think you could put it that way, that it's normalizing rather than really easing.
03:22 OK.
03:23 So maybe a distinction without difference.
03:24 But words matter here, Jan.
03:26 And we haven't talked about Donald Trump yet.
03:28 And it feels like when you talk about the Fed, when you talk about the inflationary outlook, even when you talk about
03:34 growth, you have to talk about tariffs.
03:36 What is your base case for tariffs right now?
03:39 And I know it's hard before the man even gets into the office, but what are you expecting there?
03:43 We're building in tariffs on China, so a 20 percentage point increase on average in US tariff rates on China.
03:53 And we're building in auto tariffs on
03:55 the European Union and Mexico
03:58 beyond that.
03:59 And and that gives us
04:01 you know a modest negative impulse to growth.
04:05 I mean
04:06 in its by itself there are some other changes in policy that are more growth positive, but a few tenths
04:12 of of growth
04:13 and we have about 3 or 4/10 of additional
04:17 inflation in 2025
04:20 because of the tariffs.
04:22 With that we still have inflation coming down from 2.8% now to 2.4% by the end of the year, but we'd be very close to 2% if it wasn't for the tariff impact.
04:32 So it's a, it's a sort of mixed
04:34 impact impact.
04:36 I think
04:37 markets have very much focused on the fact that you know, you probably will see somewhat more inflation in the short term.
04:44 They've taken that as quite hawkish,
04:46 but it's double sided.
04:48 I mean you have it, you're on the one hand you have an inflationary impact.
04:51 On the other hand,
04:52 there are also some risks to markets if we were to see a more aggressive
04:56 tariff posture, which of course is a risk we don't know as you.
05:00 As you said,
05:01 I would also say we were talking about all the data that's coming out this morning.
05:04 Won't put you too much on this, but I know you're right in front of us.
05:06 But I want to point out that the ISM, ISM services prices paid has also been rising and that's also leading a lot of this movement in the yields as well.
05:16 You're also seeing traders wipe out the possibility of a full Fed rate cut before July.
05:21 So tremendous spread
05:23 in the market right now and tremendous uncertainty
05:26 when you look forward.
05:28 I think something that is confusing about the longer end of the curve, not even the bottom end, is when you're thinking about how the Fed doesn't just treat the Fed funds pricing,
05:40 but the longer end of the curve, quantitative tightening, running off the Treasury portfolio.
05:44 How is that going to change the dynamics?
05:47 Because
05:48 you do risk, don't you, a tantrum.
05:52 I think the
05:53 quantitative tightening of the normalization of the balance sheet.
05:56 I mean, the idea is to have that very much in the background.
05:59 It's not a,
06:01 an active instrument of monetary policy.
06:03 I don't think it's had a major impact.
06:05 They're being very, very careful.
06:07 They might,
06:09 you know, still let it run for quite a while, but at a very, very slow pace.
06:13 They don't want to
06:14 cause
06:15 any
06:16 dysfunction in the, in the markets.
06:19 I, you know, I think
06:20 the, the key
06:22 instrument is still going to be the funds rate.
06:24 And on the funds rate, you're right,
06:26 markets have really moved pretty far away from additional
06:31 easing or normalization or cuts.
06:33 I mean,
06:34 back in September, markets were pricing a terminal federal funds rate of 270.
06:39 Now
06:40 we're more than 100 basis points above that
06:44 in terms of market pricing.
06:45 And I think markets have have have moved too much.
06:48 They were
06:49 way too
06:50 aggressive on pricing rate cuts back in September, but now I think there's some room for pricing more
06:57 interesting.
06:57 So maybe the the market overshot in both directions.
07:00 I want to stay on the long end of the Treasury curve
07:03 because it's just fascinating to see the long end rise even as you have the Fed cutting rates.
07:07 You know, we talked a little bit about QT here, but how would you explain the rise that we've seen in the 10 year Treasury yield, 100 basis points since the Fed cut rates?
07:17 What's actually going on there would you say?
07:19 I think it's a combination of two things.
07:21 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
07:29 even for the long end.
07:31 Well, that has an impact of course, if the, if markets think
07:34 now that
07:36 you know the, the funds rate is going to be
07:38 at 4% rather than 270, of course, that gets incorporated
07:44 into
07:44 the first several years of the of the term structure.
07:47 So you, you're going to have to have an impact
07:50 on the long end.
07:51 And then I think #2 the term premium
07:54 is rising.
07:55 This is the excess return that
07:57 investors can expect for holding 10 year
08:00 securities as opposed to overnight.
08:02 And that's been rising for I think a variety of reasons.
08:06 Concerns around fiscal policy are certainly part of that.
08:10 And
08:11 you know, I think that's been a trend that we have been seeing and may continue to see that's this could be a more secular
08:17 trend where as the debt to GDP ratio continues to rise, you get
08:23 a little bit of additional term premium that creeps in.
08:27 I was listening to your Odd Lots podcast with David Costin, which I thought was really great.
08:31 And
08:32 you're the chief economist and you're also the head of the research
08:36 globally at Goldman Sachs.
08:37 You seem though to focus more on the markets in in the shorter term.
08:41 And I'm wondering
08:42 at least in that podcast, and I'm wondering if you step back and look at the world what's happening in.
08:47 We were just talking about France, how
08:49 the populist party is the most powerful there.
08:51 You just saw Kickel
08:53 get a pathway to lead Austria in the first far right wing government there since the Second World War.
08:58 The Afd is very popular in Germany.
09:01 We have Trump coming back here.
09:02 What is this populist shift
09:05 due to your economic outlook for global growth?
09:08 I think broadly speaking, it increases the,
09:12 you know, the the potential risks around any
09:16 baseline scenario that's more driven by the economic fundamentals to themselves.
09:20 I think there is more risk of,
09:23 you know, exhaustion shocks from
09:25 fiscal policy and from trade policy and just from conflict between
09:30 countries, whether that's
09:32 in the trade arena between countries that are, you know, military
09:36 and geostrategic allies or more significant
09:41 military conflict than in other cases.
09:43 And obviously there are a number
09:45 of examples of this.
09:46 So if I look back
09:48 over the,
09:49 you know, 2728 years that I've
09:52 been an economist
09:54 working in markets, I put a lot more weight on these exhaustion of shocks now than I did when I when I started.
10:00 In my career, you know, what about.
10:02 And, you know, there are many, many different aspects of that.
10:04 I think a lot of the
10:06 populist backlash in in Europe
10:08 that we're seeing now
10:10 is, is certainly an aspect of that.
10:12 But
10:12 this is a
10:13 conversation that could go on for a long time.
10:15 What about internal politics?
10:16 And I've got to say, yeah.
10:17 And
10:18 from tariffs to to politics, we
10:20 could go anywhere with you.
10:21 But I do want you to weigh in one of the larger stories of today.
10:24 You had Michael Barr stepping down as the vice chair for the supervision for the Federal Reserve.
10:29 You have a lot of chat around Mickey Bowman
10:31 around taking that spot.
10:33 What does that mean in terms of the composition of the Federal Reserve?
10:37 You have one of the largest Hawks on the Federal Reserve being put up for a different type of position.
10:42 She has been
10:43 very critical, let's say, of some of the bank regulations.
10:47 What does this mean for the impetus to raise interest rates?
10:50 By the way, it's not unrelated.
10:52 It's not unrelated to my question, right?
10:53 Because we were talking about Jason Furman's
10:56 tweet.
10:56 This is sort of bowing to populist, the next populist
11:00 who could be are getting concerned
11:02 for sure.
11:03 I mean, for monetary policy, I don't think it's going to have a a very significant impact in the sense that,
11:10 you know,
11:11 the
11:11 Board of Governors is fully staffed.
11:13 Michael Barr has said that he is
11:16 going to remain a governor.
11:17 So,
11:18 you know,
11:19 clearly Bowman has been more hawkish
11:22 on on monetary policy.
11:23 I'm sure that's going to continue to be the case.
11:25 The read across from that into what happens on the regulatory and supervisory front.
11:31 I think it's going to be limited.
11:33 Obviously,
11:34 we've seen
11:35 a, you
11:36 know, big shift in terms of the political environment that's going to have implications for regulation, not just in the financial sphere, but probably also in other areas like mergers
11:47 and maybe energy regulation.
11:49 And I think this is part and parcel of that broader shift in terms of the regulatory agenda.
11:55 All right, Jan, unfortunately, we have to leave it there.
11:57 A real master class.
11:58 Hope you come back soon.
11:59 That is Jan Hatzius
12:01 of Goldman Sachs.

Jan Hatzius: How the Market is Moving Ahead of Trump

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