There is a real chance that the U.S. economy is going to suffer a recession or “hard landing” in the next two years, according to the economic team at Goldman Sachs.
The bank’s economists see the odds of a recession at about 15% in the next 12 months, with the odds rising to 35% over the next 24 months.
With inflation above 8% for the first time in forty years, Fed officials say they are laser focused on getting interest rates up.
One reason recession odds are so low for the next 12 months is that the Fed benchmark rate is so low — in a range of 0.25% – 0.5%. The U.S. central bank ‘s policy rate won’t be up to a “neutral level” that no longer boosts inflation until the end of the year. Moving rates into “restrictive” territory – generally seen as above 2.5% — won’t happen until 2023.
The Fed wants to try to engineer a soft landing, raising rates enough to cool inflation but not so much as to damage the labor market.
Last week, New York Fed President John Williams said achieving a soft landing would not be easy.
On Monday, William Dudley, his predecessor at the helm of the New York Fed, said a hard landing was inevitable.
In their note to clients, Goldman said it didn’t believe a recession was inevitable.
The Fed will benefit by post-covid normalizations in labor supply and durable goods prices. More people coming back into the workforce will cool off wages and with the pandemic easing, households are expected to spend more on vacations and other services.
The main goal of the Fed’s plnned rate hikes is to slow wage growth from its recent 5%-6% pace to at least 4%-4.5%, Goldman said. That would help cool inflation close to the Fed’s 2% target in 2023 and 2024.
The current strong economic momentum also limits the risk of a recession in the near-term, Goldman said.
But Goldman said that it expects the Fed to raise its benchmark rate up to range of 3- 3.25% before they are able to get inflation under control. This is what raises the odds of a recession, the firm said.