Goldman Sachs chief economist: 25 bps Fed cut likely

Wall Street is confident that the Federal Reserve will initiate an interest rate cut at its September meeting, but many are split on the exact amount of the cut. Yahoo Finance Executive Editor Brian Sozzi sits down with Goldman Sachs chief economist Jan Hatzius at the Goldman Sachs Communicopia and Tech Conference to discuss the state of the economy and the Fed's next moves.
Hatzius believes that a 25-basis-point interest rate cut will be the likely outcome at the September meeting, explaining, "I think that's more consistent with the data that we've seen since that the weaker than expected jobs report a month ago." However, he wouldn't rule out a 50-basis-point cut, arguing that there is a "solid rationale" for the larger cut. He explains that the Fed funds rate is "really high," the highest among the G-10 despite the US making more progress on inflation than other countries in the group. "So you could certainly make the case that they should be bringing down that rate quickly," he explains.
He notes that if the Fed moves forward with a 25-basis-point cut, he expects it to be the beginning of a series of cuts. "I would also expect them to signal clearly, as Governor Waller did on Friday, that they'd be very willing to scale up the pace if the data disappoint," Hatzius adds. He argues that a 25-basis-point cut will also give investors less reason to panic, while a 50-basis-point cut would indicate that the US economy is in worse shape than expected.
While the economy is slowing, Hatzius believes that it is not doing so too much: "Yes, it is slowing relative to where it was maybe six months ago for sure, but that was very rapid growth, you know, of 3% or more. We're still tracking 2.5% growth in the third quarter. Our forecast for next year is only a few tenths below that — 2.25%. Those are very solid numbers."
He explains that while the unemployment rate has risen, it is largely due to an increase in labor supply caused by immigration. "A lot of those people have entered the workforce and now are still entering the workforce, and it's taking some time to absorb them. And in the meantime, the unemployment rate rises. That's my hypothesis for what's going on. And I so I think that it's more the labor market rebalancing, labor market softening rather than a big slowdown in in growth," he tells Yahoo Finance.
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