Baseball players always know when they hit the sweet spot.
That’s the point at which the bat connects to the ball with great power and little vibration, and the ball takes off.
That expression has gone beyond America’s national pastime to mean an optimum point or combination of factors or qualities.
When Donald Trump was sworn in as the 47th president of the United States, Goldman Sachs Chief Economist Jan Hatzius said the U.S.economy was in the sweet spot of healthy growth and gradual disinflation.
“We estimate that real GDP grew 2.6% in Q4 and expect a similar pace in 2025,” he said in a research note.
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“Our forecast is [0.5 percentage point] above the latest Bloomberg consensus, in part because we are still more confident than others that real disposable personal income will grow solidly in 2025 and in part because of a sturdy forecast for business investment,” he added.
Hatzius noted that Goldman Sachs was not as far above consensus as it was for most of the past two years. That’s because other forecasters have become more optimistic given ongoing strength in the data and, in some cases, high expectations for the growth-positive aspects of the Trump agenda.
US President Donald Trump holds an executive order he just signed during the inaugural parade inside Capital One Arena. Some analysts have high expectations for growth under the new administration. (Photo by Jim Watson / AFP via Getty Images)
Other voices of optimism on U.S. economy
Others share those high expectations, including the renowned investor Stanley Druckenmiller, who told CNBC that “we’re probably going from the most anti-business administration to the opposite.”
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“We do a lot of talking to CEOs and companies on the ground,” he said. “And I’d say CEOs are somewhere between relieved and giddy. So we’re a believer in animal spirits.”
The veteran Wall Street analyst Stephen Guilfoyle wrote in a post for TheStreet Pro that he would try to be publicly apolitical as possible, but he was nevertheless thankful that “Treasury Department is now rid of former Secretary Janet Yellen, who botched federal debt duration to the point of either incompetence, recklessness or both.”
“She could have pushed out that duration,” Guilfoyle, known as Sarge, whose career goes back to the floor of the New York Stock Exchange in the 1980s. “She preferred to leave her successor an unnecessary mess.”
Bank of America Securities analysts Ebrahim Poonawala and Brandon Berman said Wall Street would be looking for validation that the “optimism surrounding a pickup in customer activity” in the aftermath of Trump’s win and Federal Reserve interest rate cuts “is beginning to play out.”
They see that pickup led by merger-and-acquisition activity and initial public offerings, “followed by a rebound in loan demand by mid-2025.”
The B of A analysts see potential for wider-than-expected expansion of net interest margin “on the back of a positively sloping yield curve.”
And they expect “M&A appetite among management teams” given the outlook for a less-restrictive regulatory backdrop in the new administration.
Inflation and interest rates into 2025
Inflation was a major issue during the presidential campaign. Goldman Sachs’s Hatzius said that while it was gradually trending down, the trend is occasionally obscured by month-to-month volatility, catchup in categories with infrequent price adjustments, and post-pandemic difficulties in the seasonal adjustment process.
Last month, Federal Reserve officials made their third and final rate cut of 2024. The Federal Open Market Committee is scheduled to hold its first meeting of 2025 on Jan. 28-29. CME’s FedWatch sees almost zero chance of a rate cut in January and little chance of one until June.
“We are confident about two aspects of the U.S. monetary policy outlook: a) no cut at the January FOMC meeting and b) no meaningful risk of rate hikes anytime soon,” Hatzius said. “Beyond that, the picture is murky, as cuts look justifiable given the ongoing disinflation but not essential in light of the strength in the real economy.”
“Nevertheless, we have a strong view that market pricing is too hawkish on a probability-weighted basis,” he said.
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In October, Goldman Sachs predicted that the Federal Reserve would continue to cut interest rates, eventually reaching a terminal rate of 3.25% to 3.5%.
Now Goldman’s baseline forecast is for two 0.25-percentage-point rate cuts this year, in June and December, followed by one cut in 2026 to a terminal rate of 3.5-3.75%.
“But the risks to this forecast are tilted to the downside on net, both because the FOMC might decide to cut before June even if the economy does fine and because the FOMC would probably cut a lot more aggressively in the — unlikely but far from remote — event of a sharper deterioration in the economic data or in risk sentiment,” Hatzius said.
Goldman Sachs: Tariffs are a key question
He said that the key question over the next few months is how aggressively the Trump administration will implement its tariff agenda.
“We expect tariff hikes on China averaging [20 percentage points] to be announced over the next one to two months as well as aggressive tariffs on European autos and Mexican [electric vehicles],” he said.
Hatzius said the outlook beyond these areas was shifting somewhat, with an across-the-board tariff becoming less likely and a universal tariff on critical goods becoming more likely.
Related: Analyst reboots Fed interest rates forecast after surprising inflation data
“All this remains in flux, and tariff news is likely to continue creating volatility in financial markets,” he added. “However, the ultimate effects of tariffs on Fed policy are more double-edged than widely believed. In 2018-2019, after all, the intensifying trade war set the stage for three” rate cuts of 0.25 percentage point each.
While many commentators said that this occurred in an environment of below-target inflation then, compared with above-target inflation now, Hatzius noted that “it is also true that the [Federal Funds Rate] is above neutral now (vs. below neutral then) and that labor-market utilization is lower to boot.”
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