Goldman Sachs (NYSE:GS) has lowered the probability of a U.S. recession to 15% due to positive inflation and labor market data, according to an analysis released on Tuesday. The investment bank is notably more optimistic than most other forecasters, with a baseline GDP growth forecast averaging 2% through the end of 2024.
The Federal Reserve's cautious approach indicates that an interest rate hike in September is unlikely, despite an increase in U.S. consumer spending in July. The slowing inflation suggests that the Federal Reserve will maintain the current interest rates. Goldman Sachs anticipates "very gradual" interest rate cuts of 25 basis points per quarter, starting from Q2 2024.
The bank also predicts a reacceleration in real disposable income in 2024. This outlook is based on the recovery from the COVID-19 pandemic, which saw the Federal Reserve cut its short-term interest rate target nearly to zero in March 2020 and kept it there until March 2022. The aggressive monetary policy, along with fiscal policy and vaccines' rollout, contributed to a vigorous economic recovery.
However, this recovery was accompanied by an unwelcome and persistent increase in inflation, with the consumer price index peaking at nearly 9%, year over year, in the summer of 2022. The rise in inflation was primarily driven by developments that directly raised prices rather than wages, such as sharp increases in global commodity prices and sector-specific price spikes.
This analysis was part of a larger discussion held by the Hutchins Center on Fiscal & Monetary Policy in May 2023. The conference aimed to draw lessons from the past three years and critically evaluated the role of the Fed’s new framework and its forward guidance in the surge in inflation. The participants included former Fed chairs, economists from renowned universities, and members of international economic institutions.
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