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History suggests that the Federal Reserve will face a difficult task in tightening monetary policy enough to cool inflation without causing a U.S. recession, with the odds of a contraction at about 35% over the next two years, according to Goldman Sachs Group Inc.
The Fed’s main challenge is to reduce the gap between jobs and workers, and to slow wage growth to a pace consistent with its 2% inflation goal by tightening financial conditions enough to reduce job openings without sharply raising unemployment, Chief Economist Jan Hatzius wrote in a research report on Sunday.
Achieving a so-called soft landing may be tough, because historically large declines in the gap in the U.S. have only occurred during recessions.
“Taken at face , these historical patterns suggest the Fed faces a hard path to a soft landing,” Hatzius said.
A recession isn’t inevitable because post-Covid-19 normalizations in labor supply and durable goods prices will help the Fed, Hatzius said. There are more examples of other countries in the Group of 10 advanced economies -- a group that also comprises Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland and the U.K. -- that pulled off the soft landing, he said.
Eleven out of 14 tightening cycles in the U.S. since World War II were followed by a recession within two years, but only eight of them can be even partially attributed to Fed tightening -- and soft or “softish” landings have been more common more recently, Hatzius said. He projected the odds of a recession in the next 12 months at about 15%.
Economists recently have seen increasing odds of a U.S. recession, with 27.5% expecting a contraction in a Bloomberg survey in the first week of April, up from 20% a month earlier. They expect the consumer price index to average 5.7% in the final three months of the year, up from the previous 4.5% estimate.
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