Goldman’s Jan Hatzius: We’re still ‘far from a normal economic environment’

  • Oops!
    Something went wrong.
    Please try again later.

Jan Hatzius, Goldman Sachs Chief Economist and Head of Global Economics and Markets Research, joins Yahoo Finance Live to weigh in on the outlook for U.S. economic recovery, inflation fears and what’s next for the Fed.

Video Transcript

JULIE HYMAN: First, we do want to talk about inflation here, how much you should be worried about it. Obviously, a lot of market participants are indeed quite worried about it. Jan Hatzius is joining us now. He is Goldman Sachs Chief Economist and Head of Global Economics and Markets Research. Jan, it's really good to see you.

As you look at inflation, as I've been reading your recent notes, you do seem to be in the transitory camp, that this is not going to last at the current pace. That said, how persistent or transitory can it be and still start to have an effect on demand? I mean, even if it's not going to last at this current rate, at some point are consumers going to start to push back against rising prices?

JAN HATZIUS: It's very nice to see you too, Julie. It's very good to be on. I think that demand is normalizing in the economy. And it's normalizing in the labor markets. And that is putting some upward pressure on prices.

So I think it's really that stronger demand is normalizing prices in areas like travel and entertainment and other services, but also in the goods sector to some degree. And that is giving us these large but mostly one-off price increases. Now, they are pretty sizable. And we think the core CPI is probably going to be in the sort of 3 and 1/2% range for the remainder of the year and will come down next year, I think, but only gradually.

That said, the PCE index, which is a broader index that's monitored by the Federal Reserve, I think is going to be quite a bit lower, getting to about 2 and 3/4 in the short-term. And then we have that coming back to 2% next year. And I think in that environment, the sort of feedback effects back into consumer demand should be relatively limited.

BRIAN SOZZI: Jan, what are some of the upside risks to inflation?

JAN HATZIUS: I think the upside risks are basically second-round effects that result in inflation, even temporary inflation increases feeding on themselves. That's the short-term. Big increase in inflation expectations can give an inflation pickup more staying power. That's a possibility.

I do think that we have signs of shortages of workers in the near-term, despite the fact that we're still more than 8 million jobs short of where we were in February 2020. Nevertheless, it is harder to find workers in a number of industries than you might expect in that environment. And I think there are a number of reasons for that.

Part of it is that the virus is still not behind us. People are still worried there may be some concern about infection. Child care is an issue, although I think the evidence on that is mixed whether that's significant. And then there is this extra unemployment benefit of $300 per week, which of course is also enabling people to take their time in looking for a job.

I mean, I think that all these things are probably going to be much less of a factor once we get into the fall. So I'm not too worried about it. But in the short-term it is an upside risk.

Longer-term, I think the key question is really, is the economy going to overheat? Are we going to move far beyond the potential level, long-term sustainable level of output unemployment? If that were the case, then I think you would have to be more worried about inflation in the longer-term. But we don't really expect that. I mean, we think we'll get back to roughly full employment over the next couple of years. But I don't think we'll see a major overshoot.

MYLES UDLAND: Jan, it's Myles here. You guys finish up your last note with some interesting commentary, something I've written about a lot, which is the challenge of forecasting right now. You say that there's less than normal clarity in what the forecasts can be, and therefore we should have less than normal weight on what the data actually do kind of spit out at us on a monthly or weekly or quarterly basis.

What kind of signs will you be looking for that the data have normalized and we have a clearer picture of what the post-pandemic economy actually looks like? Do we need less volatility month to month? Do we need some of these fiscal programs to finally roll off? How are you thinking about that question?

JAN HATZIUS: Yeah, I think it's a combination of those things. I mean, just the errors relative to, say, consensus expectations in the monthly indicators have been extraordinarily large since the start of the pandemic. Obviously, it hasn't been quite as extreme recently as it was in March, April, May of last year, but still very large. And you know, I think we'll want to see some signs that these surprises diminish somewhat.

But I think a lot of it is, yeah, the temporary factors that are still affecting behavior in ways that really has an impact on the economic data. Some of the factors in the labor market that I've just talked about-- I think that is going to steer us into just a more normal environment. Right now, a lot of forecasts, I think, have the future that economic life is going to normalize over the next six months. But we're still far from a normal economic environment at the moment.

JULIE HYMAN: One aspect, Jan, of our lives, I guess-- although, probably not most of our daily lives-- that's changed during the pandemic that's probably going to stick around is cryptocurrencies and its role in our investing lives, certainly. You and your team recently wrote about the potential for a digital dollar or digital currencies backed by central banks around the globe.

Federal Reserve Governor Lael Brainard spoke about that this morning. In principle, she sort of supports the idea of it, it sounds like, although it sounds like she also thinks it should be slow and deliberate. Your team seemed to indicate that, at least on the part of a Federal Reserve backed digital dollar, you don't think it's imminent in any way. Talk to us about what would need to happen perhaps for it to go forward.

JAN HATZIUS: Well, the Fed-- I think partly because of the sort of preeminent international role of the dollar-- is going to be slower than other central banks in introducing digital currency. And there are quite a number of central banks globally that are ahead at this point. The Fed is still in the research stage.

But ultimately, I think there is appetite for introducing a digital currency, which really-- I mean, of course, a lot of the money that we have at the moment is already digital. But the key thing about the digital dollar would be that it's a digital liability of the central bank that can be held directly by households and businesses. And you know, I think we'll probably move in that direction.

I think we'll move cautiously, because there's no appetite on the part of the Fed or other central banks to really potentially undermine the current payment system and financial system. And so I think you want to take one step in front of the other and be relatively deliberate in rolling this out. So I don't think, you know, we're going to be having this very soon, and certainly not in large size.

BRIAN SOZZI: So Jan, let's say the Fed does eventually construct a digital dollar. How much risk would that present to the financial system?

JAN HATZIUS: I think it's not a big risk if it is confined to reasonably small sizes and reasonably small total outstanding amount if it is partially substitutes for physical cash without actually removing tons of cash entirely. I think then it's going to be a relatively small deal. If it were to eat more into bank deposits and the Fed were to compete more with banks for deposits, then the question, I think, would be at some point that it happens in size whether, you know, how you fund the loans that are being extended by the banking system. You might then have to have more lending from the central bank to the commercial banks in order to fund the loans, assuming that the Fed doesn't want to get into the business of making loans on an ongoing basis to households and businesses. And I don't really see any appetite for that.

So I think small steps are not likely to be very disruptive. Large steps could be disruptive. And that's why I think you need to move slowly and gain a lot more experience before you ramp it up.

JULIE HYMAN: Jan, what about the disruption that could be caused to existing cryptocurrencies? And it seems like whether it's a digital dollar or other digital currencies, they're sort of designed to do something different, really, than crypto is at this point. But do you think that that dynamic will change if we start to see various central banks around the world introduce these types of digital currencies?

JAN HATZIUS: Well, I do think they're designed to do something different. And the central banks, I don't think, are going to be substituting-- you know, a central bank digital currency isn't going to be floating in value. It's not going to be-- it's not going to be different from other types of the dollar. It's always going to be a one for one, so it's not going to be an object of speculation and an investment the same way that cryptocurrencies are at the moment. So I would view these things as really quite separate from one another.

JULIE HYMAN: Jan, it's great to get some time with you. Hope to see you again soon. Jan Hatzius is Goldman Sachs Chief Economist and Head of the Global Economics and Market Research team there. Thank you again, Jan.