The risk of an accidental recession is increasing, according to Goldman Sachs


New York
CNN Business

Goldman Sachs urges the Federal Reserve to be patient in its quest to crush inflation.

Even though inflation remains far too high, the investment bank says the Fed has already made ‘remarkable’ progress in slowing the US economy and easing concerns imbalance between supply and demand in the labor market.

The progress comes after the Fed raised interest rates at the fastest pace in at least four decades, marked by three consecutive rate hikes three-quarters of a percentage point.

“Fiscal and monetary policy tightening has so far succeeded in sharply slowing demand growth without accidentally overdoing it and triggering a recession, an impressive achievement,” Goldman Sachs economists wrote in a note to the media on Sunday. clients.

For example, the decline in job openings is twice as large as any drop in U.S. history outside of a recession, the bank said.

That’s why Goldman Sachs said the risk that a recession will prove necessary to get inflation under control has “declined a bit.”

However, Fed officials signaled that they are not nearly done with their round of rate hikes, with more expected at both next week’s meeting and the December meeting.

Goldman Sachs warns the Fed against any excess.

The bank said the risk of the Fed raising rates enough to “cause an unnecessary recession” has “probably increased somewhat.” The main reason for this assessment, Goldman Sachs said, is that it is “increasingly clear” that housing and health care inflation – two key components of the underlying inflation trend whose Fed officials care – will remain “uncomfortably high through 2023” no matter what happens in the labor market. This is despite the fact that Goldman Sachs expects inflation to fall “substantially next year”.

“Too much focus on lagging indicators, too little patience or too rapid tightening to assess the impact on the economy in real time could lead to a recession that is not fully anticipated,” Goldman Sachs said.

In other words, the Fed could sink the economy even if a recession is not necessary to control inflation.

Goldman Sachs has said it will increase its chances of an unnecessary Fed-induced recession if officials start signaling that ongoing rate hikes of at least half a percentage point are appropriate until the inflation drops significantly.

Goldman Sachs warning comes as recession predictions continue to pile up. The latest: The Mortgage Bankers Association is now calling for a recession starting in the first half of next year, pushing the unemployment rate to 5.5% by the end of 2023.

“The sharp rise in interest rates this year – a consequence of the Federal Reserve’s efforts to curb inflation, will lead to an equally sharp slowdown in the economy, matching the slowdown now occurring in the housing market” , said Mike, chief economist of the MBA. Fratantoni said in a statement.

A Bloomberg Economics model released last week determined that the risk of a recession over the next 12 months is now at a staggering 100%.

On the other hand, Goldman Sachs emphasizes that a slowdown is not inevitable. The bank sees a 35% chance of a recession in the next 12 months. Although this is roughly triple the historical average for a typical year, it is well below the consensus of 63% in a recent Wall Street Journal survey.

“The U.S. economy is growing well below its long-term potential rate but does not appear to be on the verge of recession at this time,” Goldman Sachs economists wrote.

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