Mabrouk Chetouane, Head of Global Market Strategy at Natixis Investment Managers, and Garrett Melson, Portfolio Strategist at Natixis Investment Managers Solutions, compare their views on the midyear macroeconomic outlook.

Mabrouk Chetouane (MC): Since the beginning of the year, we have seen many different scenarios predicted for the US economy, ranging from recession to expansion. In your opinion, where are we in the US economic cycle? Have we initiated a soft landing?

Garrett Melson (GM): The debate between hard and soft landing has now been put to bed. I think we've had a soft landing. Inflation is still modestly above target and the narrative has shifted somewhat given the altered trade backdrop. But inflation is now close enough to the target and both the labour market and growth are holding up – that is, effectively, a soft landing. To my mind, the bigger debate is where we go from here.

On the surface, we are roughly back to where we started the year. And, while the tariffs have been unwound significantly, they are still likely to settle in at a higher level than where we started the year. It’s not a drag that necessarily pushes the US into recession, but it is an incremental headwind that speaks to the bigger story in our mind, which is that the US economy continues to cool under the surface.

I think the real risk for the economy right now isn't so much external shocks or even tariffs and trade, it's that the Fed remains sidelined by worries about the upside inflation risks from tariffs and so it keeps policy rates steady while the nominal economy continues to cool. That would effectively be passive policy tightening which could really exacerbate the cooling process that is already under way.

The good news is that there is a pretty easy solution for what is ailing the economy.  A few of the rate sensitive areas in the economy, namely housing and, to a somewhat lesser degree, CapEx, non-residential investment, are showing the effects of tight policy rates and it doesn't take much in terms of easing policy rates to help unlock activity there.

But I think the big story is that a lot of the US economy is kind of in stasis. The labour market continues to cool. The housing market is stuck in mud as well. If you continue to see softness in construction data, which is our expectation here, then the lone pillar supporting everything is consumption.

And there I think the big story is building slack in the labour markets translates to softer wage growth, which translates to softer consumption and softer nominal growth. And I think that is the big risk over the next couple of quarters.

MC: What are your thoughts regarding monetary policy in the US?  We’ve heard US Fed Chair, Jay Powell saying a couple of weeks ago at the latest FOMC meeting that the current level of interest rates and monetary policy are “slightly restrictive”. Given what you have just said, do you think that the Fed is behind the curve, or do you think there is no need to rush to lower rates just yet?

GM: I think the Fed is somewhat intentionally setting itself up to be behind the curve. Part of that is, I think, maybe a slight misread of labour market dynamics. We have heard repeatedly from Powell that the labour market remains solid and that is true if you look at the headline numbers. But, if you look under the surface, there's a stronger case to be made that there's a number of red flags waving which are different from the dynamics last year.

The unemployment rate has risen for each of the last four months in unrounded terms almost a total of 25 basis points¹. So it's a pretty steady but slow grind higher here and the Fed has been pretty clear that they're really focusing on the price side of the mandate right now. There's still max uncertainty on either side of that dual mandate.

But, for now, they've shifted into this forecast dependency mode where they expect upside inflation risk from tariffs, as do we, but we see the bigger risks on the growth side of the dual mandate. If those price increases which are essentially a tax hike on consumption in the form of tariffs, are occurring against a backdrop of cooling nominal incomes, that just translates to demand destruction, not some sort of persistent inflationary cycle. So, that's our bigger take away. And you even heard Powell somewhat acknowledge that, saying that, if it weren't for the tariff risks, they would probably be cutting.

The implication of this is that if they don’t cut now and growth cools more, it just means they probably have to cut a little bit more later. I think it's pretty clear from our perspective when you look at rate sensitive areas of the economy, it just doesn't work where rates are right now and the Fed is still kind of waiting for that greater clarity, which may take some time, and you might get a good amount of cooling in the labour market between now and then that just translates to maybe more cuts than what the Fed expects and more cuts than what's priced in.

MC: The FOMC's median projections suggest two further rate cuts, and the market seems to be in line with this projection. Do you think there is a chance that we will see another significant cut, say 50 basis points in September, as was the case last year?

GM: I think we're expecting around 2 cuts for by year end. You know, I'd say that's somewhat fair pricing. I would probably say there's an incremental chance of one more cut. So maybe you get 75 basis points. It's not necessarily our base case, but it does get exactly to the risk, I think for the outlook right now, which is as the economy and the labour markets continue to cool and the Fed stays put, that just increases the odds they have to cut more later. So, it really kind of comes down to just how much and how rapid we see that cooling play out in the in the economy.

MC: Do you think that all these macroeconomic uncertainties fuelled by the growing US debt and the ongoing tariffs policy justify the debate around whether US Treasuries, and the US dollar itself, are still perceived as safe haven assets?

GM: We've heard all the narratives about the death of US exceptionalism. We don't really buy into that. Last year, everybody piled into any USD-denominated asset they could on the hopes of a pro-growth agenda following Donald Trump’s election late last year.

The trend reversed then sharply with growth expectations rising in the Eurozone because of the German fiscal stimulus announcement. And then basically there was this catch down in US growth as a result of a self-inflicted wound by tariffs. The lack of a risk off bid to the US dollar has certainly bolstered calls that it’s lost its safe haven status.

But there's a big difference between losing reserve currency status and a mere selloff. And I think you're just seeing the latter, not so much the former. The dollar remains too entrenched in the global trade and finance systems. Finding a reliable alternative is a process that takes time. I think that this narrative is overdone. I wouldn't be surprised to see the dollar stabilise and US treasuries catch up a bit.

MC: So, I take it you aren’t yet ready, as a US-based investor, to consider allocating away from US equity markets in favour of European stocks?

GM: it's hard to get really excited about leaning heavily into the international trade as US-based investor. Reducing large underweights to the bloc after more than a decade of underperformance is one thing, but the engine of global growth remains technology, and the US remains the leader in that space. I don't think that's changing anytime soon.

MC: In your opinion, what could be the long-term consequences of Trump's tariffs and tax policies if he manages to implement his full program?

GM: I think a lot of people have looked at the price tag of the 'One Big Beautiful Bill' increasing US debt by over $2.4 trillion and expect this pretty big number to translate into a meaningful positive growth impulse. But the big driver of that deficit number is basically just extending current tax cut policy, which is to say, maintaining status quo doesn’t incrementally provide a positive impulse to growth.

And when you start to layer on the cuts to food programs, the cuts to Medicaid, and then add tariff revenue, you actually end up with a modest fiscal impulse for 2026, maybe something around 20, 30, 40 basis points, not a huge number. It ultimately shifts over the longer run to a net fiscal drag and a pretty meaningful one if we assume those policies remain in place. I think that this policy is pretty regressive for lower incomes which really drive that marginal rate of growth and, more broadly, pretty negative from a fiscal impulse perspective.

Looking at the immigration policy, if we continue to keep it in place, you should expect to see slower demographics growth and slower labour force growth, which are core underlying drivers of economic growth. We haven't mentioned the deregulatory effort. I think that's probably going to be more in the headlines as we move through the summer. Michelle Bowman [Federal Reserve Board Governor, and recently confirmed as Vice Chair for Supervision] laid out her deregulatory push on the banking sector, which could have some positive implications for the financial services sector. Though if the growth backdrop is cooling, it doesn’t matter how easy you make access to credit as demand for credit is likely to be lower. Hence that deregulatory push might not translate into as much of a positive growth impulse as hoped.

MC: Deregulation could lead to stronger growth in the US in the short term. But history keeps repeating itself. Every time we deregulate, it ends up going wrong in the long run. The regional banking crisis that hit the US in March 2023 is a good example of this. Are there any other key topics we haven't covered?  

GM: We've had a really encouraging sharp rally back from the April lows.  You've certainly seen sentiment rebound. You've seen flows come back. You've seen some re risking. We're basically back to above pre-liberation day levels, within striking distance of all-time highs, against that backdrop where we see growth continuing to cool and labour markets continuing to soften and the Fed basically exacerbating that cooling at least in the near term.

I think we might be setting ourselves up for maybe a growth startle – similar to what we saw last summer where markets are kind of buoyant and looking through those downside risks. But, then you get softer data and suddenly they can't look through those downside risks anymore. You start to price in and extrapolate that weakening a little bit more and markets react as a result.

So it's a real possibility as you move through the summer, maybe towards the back end of the summer, that the organic outlook for the economy probably makes a case for maybe a little bit of that growth startle. But to us that would be a pretty attractive entry point to be leaning into growth and those higher beta, cyclical areas of the market.

MC: Do you think the trade policy will trigger the feared inflationary surge?

GM: Obviously tariffs pose some risks through specific core goods. But I think we're somewhat losing sight of the bigger picture which is that we still have disinflationary tailwinds in place. Some of the inflation data have been pretty encouraging this year. May will probably be the third month where Personal Consumption Expenditure inflation came in below target in annualised terms.

I think a lot of people are a little too focused on the potential inflationary effects of tariffs and not focused enough on the fact that housing still has a big disinflationary pipeline that's going to be playing out over the course of this year.  Housing services account for over 40% of the core Consumer Price Index (CPI)’s basket and around 17-18% of the Core Personal Consumption Expenditures (PCE)’s basket².

So that is a really powerful driver and it's really one of the lone areas that's responsible for the remaining overshoot relative to the Fed's target here. So you continue to have progress there. It can offset some of the inflationary pressures that you may see filtering into some of the core goods data.

In addition, tariffs are an increase in cost, but not necessarily an increase in price. It comes down to how corporates decide to manage those increased costs. In some areas it may be passed through entirely to consumers, but there are other areas where there's probably some room for corporates to maybe eat some of their margin just to protect market share.

Also it is important to remember that tariffs are assessed to the import cost, not the final selling price. And so generally that import cost is probably around 40% of the final price charged to consumers. So it's not a one for one, 10% increase in tariffs does not translate across the board to a 10% increase in prices.  Hence those effects from tariffs are going to be a little bit more limited than most expect.

MC: We are seeing a surge in gold prices amid significant tensions. By buying more gold, central banks are seeking to diversify and protect their foreign exchange reserves. What are your views on this?

GM: If you look at the gold price evolution, it has been a kind of steady line higher for a few years now at this point.  If you look at the one-year chart, it's basically just straight up and to the right.  central bank demand has been a big driver, alongside the uncertainty around the US trade policy. Correlations have completely broken down between gold and real yields since the outbreak of the conflict in Ukraine.

It doesn't take a big shift in allocations out of US Treasuries into alternatives like gold to move the needle pretty significantly in terms of the price of gold. You’ll probably continue to see that that marginal reallocation of reserves from central banks and reserve managers as sanction risks persist. And trade tensions and uncertainty are also helping to provide a bid to gold, but I do think, as I said earlier, we've probably gone a little bit too far in terms of that death of US exceptionalism theme and this idea that you can't trust US Treasuries as a reliable safe haven asset. The safe haven status of US treasuries is not really up for debate.

MC: In my opinion, the resurgence of macroeconomic volatility in recent years may partly explain this rise in the price of gold. In a world confronted with a mounting number of endogenous and exogenous shocks and lacking clear direction, can gold be considered a safe haven asset in the same way as US Treasury bonds?

GM: Gold is a safe haven until it's not. And you can certainly see times when it's basically just another risk-on asset. So, if you're looking for that reliable diversification, it might serve as a hedge against elevated macro volatility. But it works until it doesn't and then it can be pretty painful.

Written in June 2025