Goldman's Hatzius says Powell not about to fight Volcker over Jackson Hole interest rates

(Bloomberg) — The message from markets this past week was that Federal Reserve Chairman Jerome Powell will channel his inner Paul Volcker and bring the fire and brimstone of big, inflation-crushing interest rate hikes in remarks in Jackson Hole on Friday.

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Not so fast, says Goldman Sachs Group Inc.’s chief economist. Jan Hatsius.

“I think he will make the case, as he did in his last press conference, for slowing the pace of increases.” We had two moves of 75 basis points. Our expectation would be, barring significant data surprises, that September’s move is 50,” Hatzius told Bloomberg Television’s Surveillance on Tuesday. “I don’t think he’ll be specific about the number, but I think he’ll say there’s a risk of over-tightening, and therefore it makes sense to go a little slower than the oversized increases.”

Investors may be following Hatsius’ view. Stocks steadied on Tuesday, although the S&P 500 is still down nearly 4% from a week ago. Treasury yields fell, but the 10-year yield remained near 3% after nearly doubling in 2022.

Hatzius does not suggest that Powell will suddenly become Arthur Burns, the 1970s Federal Reserve chairman known for loose monetary policy. Burns was replaced by G. William Miller in 1978, and a year later came Volcker, who raised rates until inflation subsided.

Powell “will make it clear that the work is not yet done” when he speaks at the Fed’s annual symposium in Wyoming, the Goldman economist said. “Inflation is too high. They are very committed to bringing inflation down to 2%.”

The central bank has raised its overnight lending rate four times this year to 2.5% from near zero to combat still-high US inflation at 8.5%, the fastest pace since the 1980s century. But the central bank must perform a “balancing act,” Hatzius said, raising interest rates enough to lower the prices of goods and services while not pushing the economy into recession.

“We continued to be in the soft landing camp,” he said. “It will be a decelerating environment. In a year, in two years, inflation will be much lower.

To get there, Hatzius expects a Fed rate of “3.5% or more,” he said. “If you get to the mid-3s or maybe even a little bit higher, and then you stay there. Although inflation will look a lot better a year from now, I think it will still be well above target and ultimately they really want to get back to quite close to 2%.”

(Corrects succession of Fed Chair in 5th paragraph)

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