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Chance of recession at 35% in next two years, says Goldman

Kitco News

(Kitco News) As the Federal Reserve gets ready to introduce oversized hikes, recession calls continue to grow, with Goldman Sachs adding its projection into the mix.

Goldman sees a chance of a recession over the next two years at 35%, according to the bank's economists. Over the next 12 months, that chance is lower at about 15%.

One of the significant obstacles for the Federal Reserve during its tightening cycle will be the labor market. Based on previous scenarios, the Fed will have a hard time battling inflation by raising rates without triggering a recession, according to a note published Sunday by Goldman's chief economist Jan Hatzius.

Keeping the job market healthy while trying to slow wage growth will be tough, making the so-called "soft landing" a difficult task for the Fed, Hatzius wrote. "Taken at face value, these historical patterns suggest the Fed faces a hard path to a soft landing," he said.

On the other hand, this does not mean that a recession is inevitable, Hatzius added, citing that the post-COVID boom and normalization of supply chain disruptions could work in Fed's favor.

Here's what history has to say — out of 14 tightening cycles in the U.S. since 1945, a recession followed eleven, but only eight were at least partially blamed on the Fed, Hatzius said. Plus, "soft landings" have been happening more and more in recent history.

Either way, the growing risk of a recession in the U.S. is undeniable as the Federal Reserve pursues aggressive tightening at its upcoming May and June meetings. The markets are not ruling out two oversized 50-basis-point rate hikes.

And Goldman has joined a rising number of other banks talking about this very topic. Last week, Bank of America (BofA) warned that inflation "causes recessions" and price pressures are already out of control. 

Earlier in April, the Bank for International Settlements (BIS) said that the world is "on the cusp of a new inflationary era," and adjustment to higher rates won't be easy. And Deutsche Bank was the first big Wall Street bank to make a recession call, stating that the U.S. economy will experience a "major hit" in 2023 and 2024

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