2023-07-17 21:23:53
Forget yield curve inversion, says Jan Hatzius, the chief economist at Goldman Sachs. He has just further downgraded the likelihood of a US recession occurring within the next 12 months.
The risk has dropped from 25% to 20%, Hatzius said in a note to clients published today. This chance is not far from the historical average of 15% of the last few decades, with a recession occurring every 7 years.
Goldman, which has one of the most accurate research departments on Wall Street, was already on the bullish end. Market consensus still puts the odds of a recession in the next 12 months at 54% – compared to 61% three months ago.
“The main reason we lowered the probability is that recent indicators have bolstered our confidence that bringing inflation down to an acceptable level will not require a recession,” says Hatzius.
Hatzius said that, unlike most of his market colleagues, he sees no reason to be concerned regarding the inversion of the yield curve, although its occurrence usually anticipates with reasonable accuracy the retraction in economic activity.
“Conceptually, the inverted curve means that the market prices future rate cuts that are large enough to outweigh the longer maturity premium,” says the economist.
Almost always, there has actually been a recession when this has occurred. But in his assessment there are three peculiarities regarding the current curve:
1. The curve’s premiums are well below their long-term averages, so it’s easier to invert the curve;
2. It is plausible that the Fed will cut interest rates only if inflation loses strength and, in a scenario without recession, there would only be gradual reductions in the next two or three years;
3. If economists are too pessimistic, the market may also be too pessimistic, “so the argument that the inverted curve validates the consensus prediction that there will be a recession is circular, to say the least.”
Hatzius takes a raise of 25 for granted basis points at the Fed meeting next week, pushing Fed Funds into the 5.25% to 5.5% range.
“We expect it to be the last high of the cycle,” he says. “Looking beyond 2023, we believe the market is anticipating too much cutbacks.”
Giuliano Guandalini
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