Yahoo Finance Executive Editor Brian Sozzi sits down with Goldman Sachs chief economist Jan Hatzius at the Goldman Sachs Communacopia and Tech Conference to discuss the Federal Reserve's rate cut path and how AI will transform the economy.
Hatzius believes that a 25-basis-point interest rate cut will be the likely outcome at the September meeting, explaining, "I think that's more consistent with the data that we've seen since the weaker-than-expected jobs report a month ago." However, he wouldn't rule out a 50-basis-point cut, arguing that there is a "solid rationale" for the larger cut. He explains that the fed funds rate is "really high," the highest among the G10, despite the US making more progress on inflation than other countries in the group. "So you could certainly make the case that they should be bringing down that rate quickly," he explains.
He notes that if the Fed moves forward with a 25-basis-point cut, he expects it to be the beginning of a series of cuts. "I would also expect them to signal clearly, as Governor Waller did on Friday, that they'd be very willing to scale up the pace if the data disappoint," Hatzius adds. He argues that a 25-basis-point cut will also give investors less reason to panic, while a 50-basis-point cut would indicate that the US economy is in worse shape than expected.
This is a stock market hanging on every single economic report as the economy slows down. Let's dive into all things economy Goldman Sachs chief economist Jan Hatzius. Jan always great to get some time with you, especially at the at your big conference here in September. Thanks for joining us. Maybe you can help us settle a debate we're hearing about in the markets. If the Fed will front and load rate cuts, where do you stand on that?
Whether they will I we're still in the 25 camp. I think that's more consistent with the data that we've seen since that the weaker than expected jobs report a month ago. I think Friday's numbers were while a little softer than expected, nevertheless they did show show rebound Q3 GDP is still tracking 2 and a half percent. jobless claims have come down and then if you look at the Williams and Waller remarks on on Friday, I think they were more consistent with 25 basis points in on September 18th. I wouldn't rule out 50, but but 25 does strike me as more likely. Now in terms of what, you know, the rationale might be for doing more. I think there is a solid rationale for doing 50 and the rationale is that five and three eights, five and a quarter to five and a half percent is a really high funds rate. It's the highest policy rate in the G10. It is despite the fact that the US has actually seen more progress on inflation than most G10 economies. So you could certainly make the case that they should be bringing down that rate quickly. Now, I think 25 is also defensible though, because the way that monetary policy affects the economy is via financial conditions. It's not the level of the funds rate itself that matters mostly, but but really really financial conditions and they depend on the
on on the path. You know, if so, if they do 25 basis points, I would expect them to signal clearly that there's going to be a series of cuts. I would also expect them to signal clearly as Governor Waller did on Friday that they'd be very willing to scale up the pace if the data disappoint. So, it's you know, I think 25 is is defensible. 50 you could certainly make a case for, but more likely 25.
What would a 50 basis point rate cut signal to investors? Would it signal that this is a fed worried that the economy is slowing down more than expected?
Well, that's one of the challenges and I think this is one of the reasons why the committee usually wants to go gradually, because that can be sold more as, look, we're just making some adjustments here. There's no reason to panic. And I think the people in the room that will be arguing against the 50 basis point cut probably will say, what does it say to the markets if we're doing doing 50 here? I think you can manage around that. You you can say for example, that it's this really about just the level of the funds rate, economy is doing fine, but the inflation emergency is behind us and so therefore we we just think the current level of funds rate is no longer appropriate, but it's always a risk and you could get at least in the near term, a more negative reaction because those kinds of concerns are prevalent in the market.
Why is the economy slowing down? Is the economy slowing down because of all the rate cuts that the Fed took or there's something else in play here?
Well, I don't actually think that the economy is slowing down all that much. Yes, it is slowing relative to where it was maybe six months ago for sure, but that was very rapid growth, you know, three percent or or more. We're still tracking 2 and a half percent growth in the third quarter. Our forecast for next year is only a few tenths below that, two and a quarter percent. Those are those are very solid numbers. I think the main thing that's that's happened is that the unemployment rate has risen by eight tenths of a percentage point after the latest number from on on a spot basis, but a lot of that has been increases in labor supply. You've had this very large immigration wave, especially in 2023. A lot of that unauthorized immigration and a lot of those people have entered the workforce and now are still entering the workforce and it's taking some time to absorb them and in the meantime, the unemployment rate rises. That's that's my hypothesis for for what's going on and I so I think that's it's it's more the labor market rebalancing, labor market softening rather than a big slowdown in growth.
It's not lost to me a lot of the leaders that are in this room. Uh Nvidia CEO Jensen Wong will be here. We're talking to AMD CEO Lisa Su. A lot of AI focus companies. When you're talking to these executives and you're at a conference like this, are you going to come away thinking that AI is really going to impact the economy maybe more than a lot of folks think? And what does AI mean to the US labor market a couple years from now?
So I'm definitely in the camp that AI has will have a very meaningful impact on the economy. I do think that it's important to distinguish between particular sectors of the economy where that impact is very visible now. Certainly in our data centers and energy. Those there there are significant effects from AI at this point in time and then the broad, you know, $28 trillion of US nominal GDP where it's still going to take we think several years before we see major effects. So that that's sometimes the reason for the disconnect between maybe what the the macro people say and what the what corporate leaders say in the space. I think in terms of the macro impact say five, ten years down the road, we lifted our long-term growth forecast for the US on the back of AI from 1.8% per year to 2.2% per year, sort of in the early 2030s. And that's a pretty sizable number. Obviously it's not as dramatic sounding a number as some of the you know, more more maybe micro sectoral effects, but you know, for $28 trillion economy, it's whatever that number is going to be five or ten years down the road, it's a lot.
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As the AI race shows no signs of stopping, Hatzius tells Yahoo Finance, "I'm definitely in the camp that AI will have a very meaningful impact on the economy." He explains that sectors like energy and data centers will likely see a visible effect from the AI race. However, he believes that it will take "several years" before the economy on a broader scale will feel major effects from the technology.
He adds, "We lifted our long-term growth forecast for the US on the back of AI from 1.8% per year to 2.2% per year, sort of in the early 2030s. And that's a pretty sizable number. Obviously, it's not as dramatic sounding a number as some of the more maybe micro or sectoral effects, but, you know, $428 trillion economy, or whatever that number is going to be five or ten years down the road, it's a lot."
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This post was written by Melanie Riehl