Goldman Sachs says the risk of the US falling into a recession within a year has doubled after the Fed's aggressive rate hike

Goldman Sachs says the risk of the US falling into a recession within a year has doubled after the Fed's aggressive rate hike
Jerome Powell's Federal Reserve has pledged to cool down red-hot inflation.OLIVIER DOULIERY/Getty Images
  • Goldman Sachs has said the risk of a US recession coming within a year has doubled, to 30% from 15% previously.
  • It thinks the risk of a recession is now just shy of 50% over the next two years, following the Fed's rate hike last week.

The risk of the US economy tumbling into recession over the next year has doubled following the Federal Reserve's 75 basis-point interest-rate hike last week, according to Goldman Sachs.

The investment bank's analysts, led by chief economist Jan Hatzius, said in a note Monday that the chance of a recession hitting in the next 12 months had risen from 15% before the rate hike, to 30% as of this week.

And they said the chance of a recession in the next two years had risen to just shy of 50%, from 35% previously.

The Fed's 75-basis point, or 0.75 percentage point, interest rate hike on Wednesday last week was the biggest increase in borrowing costs since 1994.

The central bank was responding to data released less than a week earlier which showed US inflation hit a 41-year high of 8.6% in May, a reading which was much higher than expected.


Following the Fed's hike and the inflation data, investors have ramped up their expectations for the path of interest rates. Many expect the federal funds target range to rise to around 3.8% by early 2023, from between 1.5% and 1.75% currently.

Goldman said these expectations had led to a tightening of so-called financial conditions. In other words, the situation in markets has worsened, with stocks falling and bond yields rising, in a way that can be expected to drag on economic growth.

"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," Hatzius and colleagues wrote.

However, Goldman said it did not think recession risks were higher than 30% this year, largely because it believes wages will not spiral upwards in a way that would force the Fed to be even more aggressive.

It said much of the pay gains in the US were largely due to one-off boosts to wages last year. The bank said there were already signs that pay is moderating.


Plenty of analysts think the US is heading for a recession some time in the next year or so, given the Fed's stated desire to stamp out inflation.

Nomura, a leading Japanese investment bank, on Monday predicted the US economy would tip into a recession this year. It said the slowdown would be shallow but lengthy, with the Fed and government reluctant to step in with more stimulus.

JPMorgan shares Goldman's view that a recession is unlikely this year, but thinks there's a 63% chance of one occurring over the next two years.

Read more: After another brutal week for stocks and a big rate hike by the Fed are we closing in on a market bottom? 3 experts weigh in on where all this leaves investors