Feb 18, 2025, 12:26 PM ETInterview, Conference Presentation

Macro questions and market strength

Jan Hatzias maintains his November assessment that economic "tailwinds" will continue to outweigh the drag from new Trump administration tariffs.
While the specific tariff scope has shifted (less focus on China, more on other areas), the estimated increase in the effective U.S. tariff rate has risen from roughly 3 percentage points to a range of 4–7 percentage points.
Despite tariff adjustments, Goldman Sachs' 2025 forecast for U.S. real GDP growth remains unchanged at approximately 2.5%.
Core PCE inflation is projected to decline to roughly 2.5% by the end of 2025.
The firm anticipates additional Federal Reserve rate cuts in 2025 but has pushed the timing for these cuts to the middle and end of the year.
Recent inflation data (CPI/PPI) was interpreted as "hotter than expected" but aligns with the "January effect," where annual price resets typically drive a temporary 30 basis point increase in monthly core PCE.
Current inflationary pressures are attributed to firms raising prices to catch up with prior cost increases, a dynamic Hatzias notes is gradually fading.

Market pricing has evolved from a simple growth upgrade to a more complex environment characterized by uncertainty regarding trade policy and Federal Reserve easing paths.
Equity markets have remained resilient near record highs, driven by strong earnings, a "wall of worry" dynamic (pricing in risks that have not yet materialized), and the absence of major tariff implementation.
U.S. equities are viewed as "priced for more good news," whereas offshore markets, particularly in China and Europe, have shown meaningful outperformance (up >10%) as they were priced for significantly worse outcomes.
The U.S. dollar has strengthened as a primary asset class, with market pricing already reflecting reasonable divergence between U.S. and non-U.S. growth/rate paths and a tariff risk premium.
Dominic Wilson notes that significant, broad-based tariff implementation could negatively impact both U.S. and global equities, an outcome the market currently views as a downside tail risk that may be underpriced.
High long-term yields (10-year Treasury above 4.5%) are viewed by Goldman Sachs as sustainable and manageable, largely driven by a "growth upgrade" rather than uncontrolled inflation.
Financial conditions remain accommodative despite high interest rates, supported by low equity risk premiums and resilient risk markets.
The Fed is not rushing to cut rates because the unemployment rate remains stable at ~4%, and there is no immediate urgency given the current growth trajectory.

The U.S. consumer continues to hold up remarkably well against higher-for-longer rates, with real disposable personal income rising by 2.5%.
Consumer strength is fueled by real wage growth (price inflation falling faster than wage inflation) and steady employment growth averaging roughly 200,000 jobs per month over the last three to six months.
Consumption is projected to grow by 2.5%, contributing to the overall 2.5% GDP growth forecast.
Payroll data has become less reliable due to the complexity of measuring real-time unauthorized immigration, increasing the "break-even" rate for strong reports from ~70,000 to an estimated ~150,000.
Goldman Sachs advises weighting the unemployment rate and household survey ratios more heavily than payroll numbers until net immigration stabilizes.
There is ongoing scrutiny regarding the consolidation and shrinking of federal agencies, though essential data sets have not yet disappeared.

The primary risk scenario for the dollar is a failure to deliver expected tariffs, which could cause relief and potential weakening of the greenback.
The primary risk scenario for the broader economy involves aggressive tariff implementation triggering an inverted yield curve, signaling expectations of slower Fed cuts in the near term but lower long-term growth yields.
Hatzias and Wilson suggest that as long as the baseline of low recession risk holds, the "wall of worry" will likely lead to a gradual upward drift in risk assets.
The firm expects that if the "tail risk" of tariffs materializes, bond markets may become more protective for equity portfolios, provided the inflation environment continues to gently cool.
Data reliability remains a key challenge; the team recommends averaging multiple indicators to mitigate noise and structural shifts in labor market measurements.