Markets have been all too eager to already price in interest rate cuts from the Federal Reserve and other global central banks. What lies in store for the US and global economies?
"We have the CPI, we have the PPI last week. You take both of those together, we're actually getting a pretty friendly core PCE number, even for December, below 0.2%," Hatzius says. "And I think that is going to keep the Fed and other central banks on the path for rate cuts."
It's all part of Yahoo Finance's exclusive coverage from the World Economic Forum in Davos, Switzerland, where our team will speak to top decision-makers as well as preeminent leaders in business, finance, and politics about the world’s most pressing issues and priorities for the coming year.
Watch this full episode of Yahoo Finance Live here.
BRIAN SOZZI: Lots of focus on the US economy and the global economy here at the World Economic Forum. We have a special guest to talk about all of those things, Jan Hatzius, Goldman Sachs Chief Economist. Jan, we consume enough of your research at Yahoo Finance. Good to see you in person.
JAN HATZIUS: It's wonderful to see you both.
BRIAN SOZZI: All right. So I think the market has been on a little bit of a rough patch the past five sessions. And that comes after hot CPI retail sales this morning, a little bit hotish. And I think it has a lot of investors concerned about the pace of rate cuts. How do you see it?
JAN HATZIUS: There has been some, I think, you know, paring back of rate cut expectations because we have had somewhat hotter numbers on the CPI, although not by a lot. But clearly, the retail sales numbers were firm.
Some of the policymaker commentary was probably a little bit more cautionary than markets had expected. And when exactly we're going to get two rate cuts is, of course, still uncertain. Markets have been priced for a lot of cuts in 2024 in the US, as many as seven cuts at one point.
And there's been some pullback from that. But ultimately, the driver of rate cuts in my view is what happens to inflation. And the disinflationary trend cutting through the monthly ups and downs, that's still very much intact.
In fact, even if you look at the December numbers, which, you know, we have the CPI, we have the PPI last week, you take both of those together, we're actually getting a pretty friendly core PCE number, even for December below 0.2%.
And I think that is going to keep the Fed and other central banks on the path towards rate cuts. So our baseline for the Fed is March. It could be May. Our baseline for the European Central Bank is April. Our baseline for the Bank of England is May.
So all of those, we think, are going to get going relatively soon, assuming our broad view on inflation is correct.
JULIE HYMAN: Jan, here at the World Economic Forum, there are a lot of other chief economists wandering around, central bankers, world leaders, CEOs. Is there anything that you have heard here that has surprised you or challenged your assumptions about the pace of global growth?
JAN HATZIUS: Well, I would say the central bankers. And this is also true. And what you see from them publicly are not endorsing the idea that we're going to get cuts in the next several months. And I mean, if I were a central banker, I'd probably also be a little bit more noncommittal until I was actually ready to cut pretty soon because you box yourself in by endorsing what is a fairly clear statement of where markets think things are going.
So I think the central bank of commentary has been sort of consistent with that. Otherwise, in terms of how the way-- the way that people talk about the economy, it's more optimistic than it's been in a long time.
And of course, that's been colored by the fact that last year turned out to be much stronger and much friendlier than many people had expected. When you go through a period where the surprises to consensus expectations are strongly in one direction or the other, what you hear at gatherings like this one is going to reflect that.
BRIAN SOZZI: If economic data continues to surprise to the upside, Jan, do you think we get to the point in the first half of the year where we start realizing maybe we don't get any rate cuts in the US this year?
JAN HATZIUS: Well, again, I think if you have decent growth-- and we, you know, certainly expect decent growth. We have a 2.3% forecast for US GDP growth for 2024. That is 1% point above the consensus. So that's definitely part of our view.
But the driver of rate cuts in our forecast and I would say in what Chair Powell said in the December press conference is that inflation is coming back down to the target. If inflation comes back down to the target, there will very likely also be rate cuts because the 5 and 3/8 federal funds rate is going to just seem very, very high relative to an economy that's producing a 2% inflation rate.
So my answer would be probably you'd still get cuts, even if the economy holds up pretty well because weakness in growth and recession is not the only way to get two rate cuts, especially if you're talking about moderate rate cuts.
JULIE HYMAN: Two of the big topics here in Davos that in conversations we've been having with people, the US election and AI. So I want to talk to you about the effect of those on the economy. Let's take elections first. What does the US economy look like under a Biden presidency, under another Trump presidency?
JAN HATZIUS: I mean, I think a lot depends on, you know, what happens not just in the presidential election, which, of course, is very difficult to predict, but also what happens in the Congressional elections, whether one side has unified control.
If you have unified control, there's typically a lot more fiscal policy legislation than if you have divided government. Now, unified control is more likely to be unified Republican control given the Senate map. I think there's a, you know, strong-- I'm not a political prognosticator. But I think there's a strong belief that Republicans have an advantage because they have fewer vulnerable senators up for re-election.
So if you were to see unified Republican control, chances are that there would be more fiscal legislation. There is around of tax cuts that were passed back in 2017 that expire at the end of 2025.
And I think you'd have a higher chance of basically having all of that or pretty much all of that extended. And so that would probably be, you know, a driver of somewhat higher growth, maybe some upward pressure on rates. I think there's an expectation that it probably would be a somewhat dollar strengthening. So that's one thing to focus on.
You know, another thing to focus on is, what happens in the run-up to the election? Is that going to have a major impact? On that, I'm more skeptical. In the past, we've not really seen, you know, major effects of impending elections on economic activity or even on Fed policy. That's another question that often comes. It's actually not easy to document significant effects on Fed policy. And so our Fed views are also not really driven by these factors.
BRIAN SOZZI: Lastly, Jan, before we let you go, on the AI front. I think Goldman several months ago published a potential or just a look at what could happen to the job market because of AI spreading. Now that you're at a conference like this, there's so much talk of AI. Do you stick by those numbers? Or do you think we might see more job displacement from it?
JAN HATZIUS: Well, what we have found is that the impact of AI, you know, on a 10, 15 year horizon-- I'm not talking about next year, I'm talking about a much longer time horizon-- on the job market is potentially very sizable if you look at the total number of work hours that could be replaced by AI.
We get numbers in the range of 25%, again, over a long period because AI replaces lower and mid-level administrative, programming, research support types of services. And the modern economy, whether in the US or in Europe, I mean, these are important parts of the labor market.
However, we also find that in most cases, it's complements rather than substitutes in the sense that maybe we all get 10% or 20% of our time back. And that, you know, is important. But it doesn't, you know, put most people out of a job.
There will be a group of people, of course, that will be out of a job because more than 50% of their time gets replaced. And society is going to have to find ways of reintegrating those workers into the economy. That's our view. Nothing that I've seen here has, you know, necessarily dissuaded me from that. But it's going to be, I think, a very, very important economic development, though perhaps a little bit more backloaded than many people are saying.
JULIE HYMAN: Right. Everybody's very excited about it here. Jan, thank you so much for joining us with your perspective. I appreciate it. Jan Hatzius, Chief Economist at Goldman Sachs.
