Goldman Sachs says the US economy will slow to a crawl as the Fed hikes rates, but will dodge a recession

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Goldman Sachs says the US economy will slow to a crawl as the Fed hikes rates, but will dodge a recession
US prices have risen sharply over the last year.Rich Pedroncelli/AP
  • The US economy will have to slow sharply to bring down inflation but will avoid a recession, Goldman Sachs has said.
  • Pandemic-era drivers of inflation are likely to ease, making the Federal Reserve's job in taming prices easier, according to the bank's economists.
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Goldman Sachs has said the Federal Reserve will have to sharply slow the US economy to bring down inflation, but said the central bank should be able to pull off a "soft landing" and avoid a dreaded recession.

Fears have been growing in recent months that the Fed will have to hike rates so hard to tame inflation — which is running at 40-year highs — that it will trigger a recession.

But Goldman analysts, led by top economist Jan Hatzius, said in a note Monday that pandemic-linked drivers of inflation should soon fade, helping the Fed in its task of cooling prices.

The analysts said pandemic-era stimulus measures are running out; supply-chain bottlenecks are likely to ease; and workers are likely to re-enter the labor force. Each of these should ease some of the pressure in the economy, they said.

Nonetheless, the Fed will still have to take strong action to ensure that wage growth does not surge and keep pushing up inflation.

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Fed hikes will likely push growth in the US economy to "below potential to about 1% to 1.5% in order to further reduce labor demand and rebalance the labor market," Hatzius and colleagues wrote.

"Decline in labor demand does not require a recession, but does require over a year of below-potential growth. This implies that there is a coherent but narrow path for a soft landing."

However, Goldman's team said a recession was still possible, especially if the pandemic-era inflation drivers do not ease as much as expected.

"If wage growth and job openings do not normalize on their own at all, the reduction in labor demand required to restore balance to the labor market would likely entail a recession."

The analysts said they still expect the Fed to hike interest rates to between 3% and 3.25% by 2023, from the current 0.75% to 1% level.

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