Trend on wage data is clearly downward and very encouraging, says Goldman's Hatzius

Goldman Sachs Chief Economist, Head of Global Investment Research Jan Hotsy is here at post 9 Jan as always happy Friday. Thanks for coming in. Good to be here. You nailed the wage number. Although in a week where we got ECI and unit labor cost, are you confident in the trend right here? I’m pretty confident that the wage trend is down despite the ECI. And if you go back to the press conference on Wednesday afternoon, Chair Powell also said that he focused more on the year on year rate. The year on year rate in the ECI was flat. The year on year rate in average hourly earnings is now below 4%. And if we take a broader look at other wage indicators, the Atlanta Fed wage tracker for example, the trend there I think is clearly downward and that’s very encouraging. Yes, the price inflation numbers have been obviously unfavorable and they will need to slow significantly over the next few months for a rate cut to occur. But I I do expect that. I do expect much better core PCE and CPI numbers in the second quarter. You’ve written a lot lately about some relief in the offing, perhaps in insurance written about the lag and shelter and that keeps you in the July camp. Yes, it does keep us in the July camp. I think that’s still the reasonable baseline. It can certainly be later. If we don’t get as much deceleration in wages then it probably wouldn’t be July, but I think it’s still more likely that it will be a July cut. Are wages the key to that super core services CPI coming down? I think the wages and the labor market rebalancing that we’re also seeing in the job openings numbers and the quits numbers. I do think that is the key to be comfortable that the trend is still down even with these worse month on month numbers in the first quarter. And do you think that if they cut in July or maybe later in the year that will prevent a recession or something worse on the economy. We don’t expect a recession. I think if we didn’t get a cut in July that wouldn’t put me into the recession camp. We have a probability of a recession over the next 12 months of 15%. So if you had worse inflation news maybe that would raise that number somewhat, but it’s pretty far from 50 Q2 tracker you’re you’re in three, three, right. I think you’re in line with Atlanta at the moment. Right now we’re exactly in line and 1.6% in the first quarter to us seemed held down by special factors, inventories, net trade, government. So we think we’ll get back to A to a stronger growth pace. Do you expect the tone of the Fed speak beginning tonight to change over the next few weeks ahead of CPI? Well, I think the tone on Wednesday was more dovish than I think many people had anticipated. I think he was more adamant that rate hikes are not on the table and that’s certainly the most important Fed speaker. What we have from other people is going to depend on, you know, there’s a range of views. You heard from Governor Bowman, she’s been on the more hawkish side. So she is not sure that policy is sufficiently restrictive. So there is a range of of views and I think people will want to see the CPI. Why do you think policy is sufficiently restrictive? Because I think the trend in inflation is still downwards. The year on year rate has continued to come down despite the worst sequential numbers. The weight labor market continues to rebalance. Wage growth is coming down. I don’t think you need significant economic weakness to get inflation back down to 2%. I think we’re getting inflation. We’re on the way to getting inflation back down to 2%. And don’t don’t forget we were at 5.6% for core PCE inflation. We’re now at 2.8. So we’ve already done 3/4 of the adjustment without any weakness in economic activity, and I think that can continue.