Goldman Sachs Group reported that history suggests that the Federal Reserve will face the difficult task of tightening monetary policy enough to cool inflation without causing a recession in the US, with the potential for deflation of regarding 35% over the next two years.
Economist Jan Hatzius published in a research report on Sunday that the Fed’s main challenge is to narrow the job gap and slow wage growth to a rate consistent with the 2% inflation target by tightening fiscal conditions enough to limit job opportunities without Sharply raising unemployment rates.
Achieving a so-called soft landing may be difficult, because historically large declines in the gap in the United States have only occurred during recessions. “If we take these historical patterns into account, they indicate that the Fed faces a difficult path,” Hatzius said. towards a soft landing.
He added that a recession is not inevitable because post-Covid-19 normalization in the supply of labor and prices for durable goods will help the Federal Reserve, and there are plenty of examples in other countries in the Group of 10 advanced economies – a group that also includes Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden and Switzerland And the United Kingdom – which has made a soft landing.
Hatzius said 11 of the US’s 14 tightening cycles since World War II have been followed by a recession within two years, but only 8 of them can be partly attributed to Fed tightening – and soft landings have been more common lately. He expected that the chances of a recession during the next 12 months would be around 15%.
Economists have recently seen the rising odds of a recession in the US, with 27.5% of them expecting a contraction according to a Bloomberg survey in the first week of April, up from 20% the previous month. They expect the CPI to average 5.7% in the last three months of the year, compared to the previous estimate of 4.5%.
