The Federal Reserve will face a difficult task in tightening monetary policy enough to cool inflation without causing a recession in the United States, Goldman Sachs Chief Economist Jan Hatzius wrote in a research report on Sunday and seen by Bloomberg. The analyst sees the odds of economic contraction at about 35% within the next two years.
According to the report, the regulator’s main challenge is to narrow the gap in what is a plentiful supply of jobs but scarce labor supply. The Fed also needs 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.
Achieving a so-called soft landing may be tough, because historically large declines in the job-worker gap in the United States have only occurred during recessions, Hatzius said. “Taken at face value, these historical patterns suggest the Fed faces a hard path to a soft landing.”
However, the chief economist said that a recession isn’t inevitable because the post-Covid-19 normalizations in labor supply and durable goods prices will help the Federal Reserve. There are more examples of other countries in the Group of 10 advanced economies that have pulled off such a soft landing, he said.
According to Hatzius, 11 out of 14 tightening cycles in the United States since World War II were followed by a recession within two years. However, only eight of them can be even partially attributed to Fed tightening -- and soft or ‘softish’ landings have been more common in recent times, he said. He has forecast the odds of a US recession in the next 12 months at about 15%.
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