Goldman chief economist on how rate cuts, AI will impact economy

Yahoo Finance Executive Editor Brian Sozzi sits down with Goldman Sachs chief economist Jan Hatzius at the Goldman Sachs Communacopia and Tech Conference to discuss the Federal Reserve's rate cut path and how AI will transform the economy.

Hatzius believes that a 25-basis-point interest rate cut will be the likely outcome at the September meeting, explaining, "I think that's more consistent with the data that we've seen since the weaker-than-expected jobs report a month ago." However, he wouldn't rule out a 50-basis-point cut, arguing that there is a "solid rationale" for the larger cut. He explains that the fed funds rate is "really high," the highest among the G10, despite the US making more progress on inflation than other countries in the group. "So you could certainly make the case that they should be bringing down that rate quickly," he explains.

He notes that if the Fed moves forward with a 25-basis-point cut, he expects it to be the beginning of a series of cuts. "I would also expect them to signal clearly, as Governor Waller did on Friday, that they'd be very willing to scale up the pace if the data disappoint," Hatzius adds. He argues that a 25-basis-point cut will also give investors less reason to panic, while a 50-basis-point cut would indicate that the US economy is in worse shape than expected.

As the AI race shows no signs of stopping, Hatzius tells Yahoo Finance, "I'm definitely in the camp that AI will have a very meaningful impact on the economy." He explains that sectors like energy and data centers will likely see a visible effect from the AI race. However, he believes that it will take "several years" before the economy on a broader scale will feel major effects from the technology.

He adds, "We lifted our long-term growth forecast for the US on the back of AI from 1.8% per year to 2.2% per year, sort of in the early 2030s. And that's a pretty sizable number. Obviously, it's not as dramatic sounding a number as some of the more maybe micro or sectoral effects, but, you know, $428 trillion economy, or whatever that number is going to be five or ten years down the road, it's a lot."

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This post was written by Melanie Riehl