Jan Hatzius on the Narrow Path to Avoid a Hard Landing

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, I feel like the big question right now from a macro perspective is, can we get inflation down to a level that's consistent with the Fed's target around 2% or at least trending in that direction without a painful recession or a significant rise in the unemployment rate?

Tracy Alloway (0:35)

I think that's exactly right. So this is the whole soft landing issue. Can the Fed hit the brakes on rising prices without pushing the US into a recession, pushing up the unemployment rate? And I have to say, history is not really on their side. We do not have a lot of successful examples of the Fed being able to do exactly that.

Although at the moment, if you look at market pricing, we're recording this on August 2nd, if you look at market inflation expectations, they do see inflation going down.

There is obviously some concern about recession risk, but I don't think we're yet at the point where people are pricing that as inevitable. So despite the lack of successful historic examples of the Fed actually engineering a soft landing, it feels like a lot of the market thinks they're gonna manage to do it this time.

Joe Weisenthal (1:29)

Well, you mentioned history, and yes, I think history is not too kind. And I think many people would say, look, when inflation is this high historically, or when inflation is significantly elevated, the only way to bring it down is with a tough recession.

On the flip side, maybe there's no reason we should be looking at history is the thing I keep coming back to. Everything-

Tracy Alloway (1:50)

This time is different? Are you gonna say it? Say it, Joe.

Say this time is different.

Joe Weisenthal (1:54)

I'll say this time could be different. And the reason I say that is not because I'm naive or Pollyanna-ish, but this has been unprecedented two years. We had a pandemic.

It was a matter of policy to bring the economy more or less to a halt with massive fiscal stimulus. We still have a pandemic. We have the shift from services to goods consumption. Nothing like that we've ever really seen. At some point, we're gonna see this renormalization, which is already happening. And so like, it seems very plausible to me that history as a guide is just not a useful roadmap for the situation we're in right now.

And maybe that's good news, but I wouldn't bet on that. I just think it's possible that history is not so useful here.

Tracy Alloway (2:36)

I think that's a fair point, but you could also say that economic exceptionalism or thinking that our current economic cycle is somehow unique or exceptional in a way helped to get us in the place where we are in right now where inflation has come in, has been and stayed much hotter than expected.

Joe Weisenthal (2:57)

Right, the failure of the Fed's transitory messaging starting in summer of 2021, really, was probably a lot of people who maybe thought like me, which is like, yeah, this is like, there are a bunch of disruptions, there are one-offs, and then the one-offs are gonna fade and all the weird price shocks are gonna fade too. But anyway, the stakes have gotten high because since then, inflation has gotten only higher and higher, many hopes that it was gonna turn down. And so now the question is, how much more will the Fed do and how much pain will we see?

Because the Fed will, you know, the Fed is determined, it seems to get that inflation rate down. How much pain do we have to bear for that to happen?

Tracy Alloway (3:36)

Yeah, it's kind of funny. I was thinking about this the other day, but it's kind of funny that in order to make things affordable in general or things more affordable in general, some people have to like lose their income altogether. But anyway.

Joe Weisenthal (3:50)

It's perverse. Anyway, let's dive in with someone who knows way more about this than either of us. We've had him on the podcast several times over the years. I'm thrilled to have in studio. I'm in studio. Our guest is in studio. Tracy is on the line, sadly, missing this in person. Thrilled to have him in studio. Jan Hatzius, the chief economist at Goldman Sachs. So Jan, thank you so much for coming back on the show.

Jan Hatzius (4:15)

It's so great to be with you, Joe and Tracy. Really wonderful to have the time to explore some of these issues. They're obviously extremely central to everything that we're thinking about.