Goldman Sachs Group Inc. chief economist Jan Hatzius expects U.S. lawmakers to cut in half the supplemental unemployment benefits that have propped up incomes during the pandemic, resulting in a slower recovery — assuming they manage to pass anything at all.
After some interruption, due to political disputes, Congress will cut the extra weekly payment to $300 from $600, Hatzius said in a phone interview Thursday. On top of that, Hatzius and his team anticipate $200 billion in fresh support for cities and states.
“If that doesn’t show up, state governments are going to be in very serious financial trouble, and you’re going to see serious cutbacks,” said Hatzius, who was one of the first sell-side economists to recognize how powerful the CARES Act would be, having written in early May that households would actually see their disposable personal income rise in 2020 despite the historic surge in the unemployment rate.
If Congress delivers something along those lines, the economy will continue to grow, but he warned that “you’re still going to see some negative impacts, because the unemployment insurance is less generous than it was before.”
There’s also a possibility that nothing gets passed, and in that case Hatzius sees a return to outright economic contraction.
Regardless of the near term, Goldman’s long-term outlook remains bleak, with unemployment remaining elevated for years to come, despite the fact that “this is a much more rapid recovery than what we’ve seen in the past,” he said.
“We’re still above 4% for the next four years,” Hatzius said of the U.S. jobless rate, which was 11.1% in June after reaching a half-century low of 3.5% before the pandemic.
The long duration of elevated unemployment also means the Fed will be on hold for years to come.
Hatzius and his team don’t expect a Fed hike until 2025, and that in the meantime Chairman Jerome Powell and his colleagues will establish some kind of “outcome-based guidance,” whereby they commit to not hiking rates until a sustained period of 2% inflation as well as the unemployment rate falling below some benchmark.
Given the wide degree of uncertainty when making Fed predictions this far out, Hatzius acknowledges that while 2025 is his base case, it’s easy to imagine a hike happening in 2023 or 2027.
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