The Federal Reserve will have to significantly slow the U.S. economy to reduce inflation, but the bank believes the Fed should be able to achieve A "soft landing" to avoid a terrible recession.
Fears have grown in recent months that the Federal Reserve will have to raise interest rates sharply to contain the current highest inflation in nearly 40 years and potentially trigger a recession.But a team of Goldman Sachs analysts led by chief economist Jan Hatzius said in a report that the virus-related inflation drivers should fade soon, helping the Fed complete its task of cooling prices.
Pandemic-era stimulus is running out, supply chain bottlenecks may ease, and workers are likely to re-enter the labor market, Goldman analysts said.These factors, they said, should all ease the economic pressure to some extent.
Still, the Fed will have to act forcefully to ensure wage growth doesn't soar and continue to push inflation higher.Hatzius and colleagues wrote that Fed rate hikes could push U.S. growth to "1% to 1.5% below potential to further reduce labor demand and rebalance the labor market."
“A fall in labor demand does not imply a concomitant recession, just a more than a year below potential growth rate. This implies a coherent but narrow path for a soft landing,” they wrote.
Still, the Goldman team said a recession could still occur, especially if pandemic-era inflation drivers do not ease as expected.
"If wage growth and job vacancies are completely out of whack, the decline in labor demand needed to restore labor market balance could lead to a recession," they added.
Goldman Sachs also expects the Fed to raise interest rates from the current 0.75%-1% to 3%-3.25% by 2023, possibly by 50 basis points each at the next two meetings.They also said there were similar odds of a 25 basis point and 50 basis point hike in September.
(Editor in charge: CF011)
