Goldman Sachs Chief Economist Jan Hatzius speaks with Yahoo Finance's Brian Sozzi about inflation, the path of the Fed, the outlook for the economy, and a potential freight rail strike.

Video Transcript

- Well, investors are focused squarely on tomorrow's CPI report, with expectations for a decline, the latest big inflation data point coming before the Fed's meeting this month. Joining us now is Goldman Sachs global investment research chief economist Jan Hatzius and Brian Sozzi standing by there at the big conference. Brian.

BRIAN SOZZI: All right. Thanks so much, Akiko. Jan, good to see you in person for a change. Thanks for joining Yahoo Finance. So CPI report coming this week. What do you expect it will show?

JAN HATZIUS: We think it's going to be another soft one. And looking for a decline in the headline, 0.1%. We think core, you know, better than it has been for most of the past year, but still 0.3%. And that's really going to be the question. Everybody knows that, of course, gas prices were down a lot. That's going to really hold down the headline number. But the core is really the question. And I think we're seeing some signs of improvement, at least on the good side beyond energy and commodity prices as well. But the extent of that is going to be the question. And then, of course, rent and owners equivalent rent. Those have been the big drivers on the services side. Do we see some deceleration there? That's also important.

BRIAN SOZZI: Gas prices have come way down since the peak. When will we start to see that in consumer spending and to what extent?

JAN HATZIUS: Well, I think we've seen it in obviously in headline inflation. We've seen it in real disposable income. So in July, we had an increase there after a lengthy period of declines. And I think anecdotally at least, consumer spending has improved somewhat. Real consumer spending has probably picked up somewhat. So I do think that the big hit from the major income weakness, inflation and the payback for the fiscal, that's behind us. And I think now we'll see gradual improvement.

BRIAN SOZZI: You're still in the camp-- or I should say you recently raised your expectations for the next Fed meeting. 75 basis point rate hike. What influence do you think that will have on the economy? And when do you think we'll start to see the broader impact of these rate moves by the Fed?

JAN HATZIUS: Well, the way that interest rates affect the economy is via financial conditions. As market expectations for Fed hikes have increased and have gotten incorporated in financial markets, financial conditions have tightened. And that's going to have a negative impact, especially in kind of financial condition-sensitive parts of the economy, interest rate-sensitive parts of the economy. Housing I think still has a significant amount of weakness ahead. The indicators there have continued to come in on the weaker side. So while the consumer might be doing a little bit better because of lower inflation, I think housing is going to be pretty soft.

BRIAN SOZZI: When you say significant weakness, what are you talking about in terms of price declines?

JAN HATZIUS: Well, so we don't have national nominal house price declines in our forecast. But we do think that it will be the most pandemic-favored places that see declines and probably already seeing declines. But that's offset by more trending parts of the country that didn't see as much of a pandemic boost that we probably still see price increases. But I think the risks are increasingly tilted towards national house price declines.

BRIAN SOZZI: So a lot of pressure still on US households. Housing under pressure. What does that mean for all the recession talk out there on the Street?

JAN HATZIUS: Well, our expectation is that we'll have a lengthy period of below trend growth where the reasons for why the economy is softer sort of shift somewhat from the consumer maybe earlier in the year to housing and maybe other areas. The international economy, of course, looks quite weak. So the foreign trade impulse is probably going to be pretty negative. But we don't have a recession in our forecast.

Our best guess is that we'll still see positive, but very subdued growth. Recession is definitely a very significant probability. We've said about 1 in 3 over the next year. And I think that's a reasonable estimate. A lot of it is going to depend on what happens to inflation, how quickly does it come down, how much more does the Fed have to do? And we are seeing some signs of improvement. But it's too early to be confident of that.

BRIAN SOZZI: We're sitting in a tech conference, Jan, with a lot of companies that have started to curtail expenses. They've started to really fine tune, notably, how much people they're carrying on the payroll. How is that going to influence a lot of these jobs reports going into end of the year?

JAN HATZIUS: Well, I think it does mean that job growth is coming down. We've been running at 400,000 a month. We think that's going to come down very sharply to more like 100,000, which is needed to kind of stabilize the unemployment rate. We probably will need to see some increases in the unemployment rate.

But our expectation is that most of the adjustment comes through open positions. There is a massive number of job openings, 11 million, that is likely to be cut pretty significantly in a slower growth environment. And especially in the technology sector, we've seen a lot of those announcements already from CEOs and in quarterly earnings calls. So I think a lot of this adjustment comes through cuts in open positions.

BRIAN SOZZI: How much further or how much do you think the Fed will be OK with letting the unemployment rate rise?

JAN HATZIUS: Well, I think some increase in the unemployment rate is what they expect. They don't like it. But they say it's probably necessary to slightly reduce the pressure in the labor market because wages are growing 5 and 1/2% or something thereabouts. And that's too rapid to get inflation back down to 2%. They're forecasting a little over 4% for where the unemployment rate is going to go.

There's another set of forecasts coming next week. Wouldn't be surprising if that number rose somewhat. I think if you have a half percentage point, one percentage point increase in the unemployment rate, that probably would be viewed as somewhat inevitable. If it's two percentage points, then that would have more of a significant impact on policy. And I think that they change policy.

BRIAN SOZZI: A lot of investors awoke today to see news of a potential railroad strike. And we're seeing a lot of concern out there that might cause another upward push in food prices. How devastating would a railroad strike be to this economy? Is it a black swan?

JAN HATZIUS: I don't think it's a black swan. I think it's an indication, along with other indications of more labor strife and maybe more tensions, that labor still has a very significant amount of market power relative to the last several decades. The labor market is extremely tight. Employers have to concede bigger wage increases and better working conditions. And strikes are sometimes the consequence of that. And so I would put it more in that direction. I don't think it's going to have a major impact on food prices certainly beyond the very near term.

BRIAN SOZZI: All right. Let's leave it there. Goldman Sachs chief economist Jan Hatzius. Enjoy the rest of the conference. Good to see you in person for a change.

JAN HATZIUS: Thanks so much, Brian. Good to see you.

BRIAN SOZZI: Appreciate it. All right. Akiko, back to you.