The recession question
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What will rapidly shifting tariff policies ultimately mean for the global economy and markets? I'm Alison Nathan, and this is Goldman Sachs Exchanges. Today, I'm joined again by Jan Hatzius, head of Goldman Sachs Research and the firm's chief economist, and Dominic Wilson, senior advisor in the Global Markets Research Group. Jan, Dom, it's good to have you back on exchanges. Thank
you. Thanks.
Jan, it's been a week for the ages, and so much has happened since we last sat down in mid February. At that time, you believed that tailwinds in the economy were more likely to trump tariff headwinds, but we, of course, since have gotten what can only be described as a seismic shift in tariff policy from the Trump administration that companies and investors are now grappling with. So first, catch us up on the implications of those shifts for your economic outlook. Are we facing recession at this point?
Yeah. I mean, if we go back two or three months, we thought coming into 02/2025 that tailwinds would probably trump tariffs. That was the title of our outlook. And that was when we thought tariffs would rise by maybe four percentage points or so if you take the average US tariff rate. Now it's much higher than that, and we now think that tariffs will trump the tailwinds. And we have a much more cautious view on The US economic growth outlook. Tariffs basically weigh on growth via three main channels. Number one, you get a price increase, which eats into households' real income and thereby cuts
what is the inflation expectation at this point? For
inflation, we're at three and a half percent for core PCE. We've been running in sort of a two and a half to 3% range for quite a while. And the latest inflation numbers, both CPI and PPI, have actually been a little bit better, but all of that is for March. Didn't really have a a meaningful tariff impact in it. And we think we'll see an acceleration of close to a percentage point from here.
So even if we are not forecasting recession at this point, we are looking at, as you said, much lower growth, much higher inflation than before these tariff announcements. Where does that leave the Fed? It seems like a very difficult spot. What do you expect? Oh,
it's very difficult for the Fed, of course. This is the sort of shock that makes it very hard to know which way to go even before you get to the magnitude. And I think it's going to really depend on two questions. One, as inflation in the short term is sure to rise and probably rise pretty significantly, that's a done deal. But how do your expectations change for inflation a year out, two years out, the sort of horizon for monetary policy. And that's going to depend a lot on what happens to inflation expectations. Do inflation expectations remain anchored, or do they rise a lot, which would th
Interesting. Dom, let me bring you into the conversation. Obviously, the markets have been incredibly volatile during this period. But I wanna start by asking about the rates market off the back of Jan's comments on the Fed. There's been a lot of questions about why treasuries actually fell and bond yields rose amid this market turmoil. We generally think of treasuries as the ultimate safe haven asset. So what's your view on what's driving those moves, and do you think this treasury route can continue? Yeah.
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