This is via a Wall Street Journal interview with Goldman Sachs Chief Economist Jan Hatzius. Hatzius has, so far, stuck with his forecast for 3 interest rate cuts from the Federal Reserve in 2025, citing:
I think a lot of the underlying reasons for disinflation are still intactfor me, (its) hard to see how we're reversing this underlying inflation processif you listen to Powell during the press conference, that seems to be where he's coming out as well. And I agree with that.Summary of Inflation Impacts:
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More detail on his inflation outlook:
Current Outlook:
Hatzius expects core PCE (Personal Consumption Expenditures) inflation to be 2.4% by late 2025, down from the current 2.8%.This revised forecast reflects a modest upward adjustment (from an earlier 2.1%) due to anticipated tariff impacts.Impact of Tariffs:
Tariffs are projected to add around 30 basis points (0.3%) to inflation.Hatzius aligns with the Federal Reserve’s similar adjustment during their recent FOMC meeting, which also factored in tariff-related inflation pressures.Sticky Inflation Elements:
Some inflation components, such as auto insurance and other sectors with annual price adjustments, have contributed to higher backward-looking inflation.Hatzius expects these effects to diminish over time, leading to less dramatic year-over-year price increases, particularly in early 2025.Underlying Drivers of Disinflation:
Labor Market Rebalancing:Wage growth is decelerating, which supports lower inflationary pressures.The labor market is gradually adjusting, helping to reduce cost-push inflation.Economic Trends:Continued disinflation trends are supported by broader economic stabilization and slower price adjustments in previously high-inflation areas.Seasonal Effects:
Hatzius highlights the potential for a smaller “January effect” in 2025, where price increases from December to January are less pronounced compared to previous years.This will contribute to lower year-on-year inflation comparisons, improving the inflation outlook.Confidence in Forecast:
Despite some volatility in inflation readings (e.g., higher numbers in September and October), Hatzius remains confident due to:Improvements in underlying inflation drivers.A favorable trajectory for wage growth and labor market conditions.Indications from November data that inflation is already moderating.From Friday's (20 December) data:
This article was written by Eamonn Sheridan at www.forexlive.com. Read More Details
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