Rick Rieder, CIO of Global Fixed Income, BlackRock and Jan Hatzius, Chief Economist, Goldman Sachs

Inflation Outlook

• Jan Hatzius (Goldman Sachs) Forecast: Core PCE inflation is currently at 3.6% (headline CPI >5%), but is projected to revert substantially to 2% by the end of next year.
  • Drivers of decline include the reversal of temporary supply disruptions (specifically semiconductor output in Asia) and the normalization of post-pandemic demand shocks.
  • Temporary boosts in household disposable income and goods demand are expected to dissipate as service spending restrictions ease.
• Rick Reeder (BlackRock) Forecast: Agrees with the short-term peak but argues inflation will exhibit significant stickiness due to structural factors.
  • Wage Stickiness: Labor shortages in key sectors (retail, biotech, tech) and record employment levels will keep wages high for an extended period.
  • Supply Constraints: Lack of capital expenditure (CapEx) in energy and commodities creates long-term price pressure.
  • Corporate Pricing Power: Companies are maintaining margins by successfully passing elevated input costs to consumers, driven by strong consumer balance sheets and high disposable income.
  • Sectoral Dispersion: Inflation dynamics vary widely by sector; healthcare prices show durable appreciation, while auto prices are historically low relative to the consumption basket, and some services (e.g., air travel) remain deflationary.

Fiscal and Monetary Policy Assessment

• Debt Sustainability: Both panelists view the current U.S. debt stack as sustainable due to demographic trends that naturally suppress real interest rates (pension and insurance liability matching).
  • Reeder notes that sovereign debt metrics (debt-to-GDP) are less alarming for a reserve currency issuer if real rates remain low and tax proceeds grow with infrastructure-driven economic velocity.
• Policy Regrets (Hindsight View):
  • Reeder: No specific regrets cited regarding the scale of stimulus, emphasizing the unique nature of the current macro environment.
  • Hatzius: Suggests the CARES Act was decisive and appropriate, but the 2021 fiscal response had flaws:
    • Enhanced unemployment benefits should have expired 3–6 months earlier to better incentivize labor supply.
    • The $1.9 trillion American Rescue Plan was likely larger than necessary and should have been spread out over a longer period to avoid temporary goods sector overheating.
  • Monetary Policy: Hatzius praises the Fed for being decisive in the initial pandemic response and deliberate in the exit, citing Volcker, Draghi, and Powell as pivotal policymakers.

Investment Strategy and Asset Allocation

• Equities:
  • Reeder maintains a bullish outlook, predicting U.S. equities will continue to rise due to high ROE, book value accretion, and favorable discount rates.
  • Growth Equity: Identified as the most attractive asset class for outperformance, particularly for funds utilizing illiquidity buckets to invest in scaling businesses.
• Fixed Income:
  • Rates are expected to move moderately higher, necessitating yield accumulation but with caution given current valuation levels.
  • Opportunities: European credit (backed by ECB technicals), securitization markets, and bespoke illiquid assets (commercial/residential real estate financing) are highlighted.
  • Geography: European banks and U.S. equities are preferred over Japan, which is viewed as a tactical trade.
• Methodology:
  • Reeder: Combines quantitative data assimilation (text mining, analytics) with fundamental research, emphasizing the need to understand the economic regime. Advocates for empowering junior staff to drive creative, entrepreneurial risk-taking.
  • Hatzius: Relies on a "living organism" forecast model that evolves with data releases and client questions, shifting focus from single point forecasts to probability distributions and alternative scenarios.

Personal Insights and Historical Reflections

• Key Influences:
  • Reeder: Cites Sandra Ackermiller and David Tepper for their ability to separate news from noise and their humility in positioning; acknowledges Bart McDade for instilling a "not about being right, but making money" philosophy.
  • Hatzius: Identifies Keynes as the paramount economist for forecasting; credits Wynne Godley for the importance of private sector financial balances; recommends the Skidelsky biography of Keynes and Lords of Finance for historical context.
• Career Highlights and Misses:
  • Hatzius: Most proud of the pre-2008 call on the housing crisis and mortgage equity withdrawal; admits a miss on secular stagnation theories in the 2010s, which led to an over-hawkish Fed stance in late 2018.
  • Reeder: Regrets timing his exit from the sell side to start his own firm in spring 2008, missing the peak opportunity in the credit crash that followed; considers building his fund franchise and hiring the right people his greatest success.