The risk of the US economy sliding into a recession this year doubled last week after the Federal Reserve implemented its sharpest interest rate hike since 1994, according to Goldman Sachs economists.
The investment banking giant now projects a 30% chance of a recession over the next 12 months, up from its previous forecast of 15%. The risk grows over a two-year span, with the bank analysts forecasting a 48% recession risk as the economy adjusts to the Fed’s tightened monetary policy.
“The Fed has front-loaded rate hikes more aggressively, terminal rate expectations have risen, and financial conditions have tightened further and now imply a substantially larger drag on growth — somewhat more than we think is necessary,” the Goldman analysts said in a note to clients, according to Reuters.
The Fed hiked its benchmark interest rate by three-quarters of a percentage point last week – with similar hikes expected in the coming months as the central bank attempts to cool inflation that hit four-decade high of 8.6% in May.
The move exacerbated fears among investors who were already skeptical about the Fed’s ability to engineer a “soft landing” for the economy without causing an economic slowdown or damaging a mostly strong labor market.
Goldman’s economists say they are “increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply.”
Fed Chair Jerome Powell and other US economic policymakers are under immense pressure to lower inflation and bring down surging food and fuel costs that have slammed household budgets in recent months.
Powell admitted that inflation “has obviously surprised to the upside over the past year” after announcing the higher-than-expected rate hike. He indicated that another hike of at least a half-percentage point was “likely” when Fed officials next meet in July.
Goldman is the latest of a growing list of institutions warning that the Fed’s policy tightening is likely to result in a recession.
Earlier this week, analysts at Nomura said they now view a recession this year as “more likely than not.” They also informed clients that the US economy is likely to shrink slightly in 2023.
The warnings contradict the stance of President Biden and Treasury Secretary Janet Yellen, each of whom said this week that a recession is not inevitable.