Jan Hatzius on Core Inflation, Fed Policy, and the 2025 Economic Outlook

Core Inflation Trends

• 📊 Core inflation has moved sideways year-over-year in 2025, with some indications of a downward trend.
• ⚠️ The recent CPI print was lighter than expected but muddied by the government shutdown, leading to uncertainty, particularly around shelter numbers.
• 📉 Underlying trends in inflation are still improving, despite potential outliers in recent data.

Federal Reserve Policy and Interest Rates

• 🎯 Both core inflation (at 2.7%) and unemployment (at 4.6%) are pointing towards potential additional Fed rate cuts.
• 🗓️ While a January cut is a possibility if the next employment report confirms upward pressure on unemployment, the current expectation is for cuts to begin in March.
• 🤝 The Fed's decision-making process is influenced by internal divisions, but ultimately driven by leadership.

Economic Outlook for 2026

• 📈 Goldman Sachs is optimistic about GDP growth in 2026, projecting an average of 2.6%.
• 💼 Despite potential GDP growth, the labor market is expected to remain somewhat soft, with the unemployment rate likely to move sideways.
• 📉 Diminishing inflation risks are anticipated due to the expected labor market conditions and economic growth.