Goldman Sachs has revised its forecast regarding the possibility of the US economy sliding into recession after the Federal Reserve announced a 75 basis-point hike in interest rates last week.
According to Goldman’s chief economist Jan Hatzius, the possibility of the US going into recession over the next twelve months has increased from 15% to 30%. He added that the likelihood of a recession occurring within the next couple of years has gone from 35% to just under 50%.
The investment bank made the revised forecast following the announcement of the 0.75 percentage point rate hike on Wednesday, June 15th. It is, at present, the most significant rate hike for borrowing costs since 1994.
The hike is seen as the Fed’s response to recent data that showed inflation in the US hitting 8.6% in May of this year – the highest it has been in over four decades. The reading was also much higher than the values predicted earlier this year.
The inflation mentioned above data and the subsequent rate hike have prompted investors to rethink their predictions as to what path interest rates will take moving forward.
The majority believe that the target range for federal funds will rise to as high as 3.8% by early next year, in contrast to previous predictions of it running between a more modest 1.5 to 1.75%.
The Goldman team added that previous expectations led to tightening financial conditions, specifically the worsening state of both domestic and global markets, a substantial fall in stock values, and rising bond yields. All of these are expected to have an adverse impact on economic growth.
Hatzius also remarked that the Fed had taken a more aggressive approach with its most recent rate hike, prompting a rise in terminal rate expectations and a further decline in financial conditions. Indeed, he and his team feel that such measures are somewhat extreme.
Meanwhile, JP Morgan agrees that it is unlikely that the economy will go into recession this year. However, its analysts believe there is a 63% chance of it happening within the next few years.
Japanese investment bank Nomura, on the other hand, believes that a 2022 recession in the US is possible. However, this economic slowdown would be prolonged if the Fed and the national government expressed reluctance to bring in further stimuli.