“The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” he said in a research note.
Market expectations of a so-called hard landing – a scenario in which the Federal Reserve‘s interest-rate hikes tip the economy into a recession – have been recently challenged by data showing slowing consumer and producer price inflation in June. Slowing inflation would likely lead to a more dovish monetary policy going forward.
Meanwhile, economic activity has remained resilient, despite significantly higher borrowing costs since the Fed started its rate-hiking campaign in early 2022.
“We do expect some deceleration in the next couple of quarters, mostly because of sequentially slower real disposable personal income growth … and a drag from reduced bank lending,” Hatzius said. However, he expected the economy to continue to grow, although at below-trend pace.
With regards to the current inversion of the Treasury yield curve – generally seen as a harbinger of an upcoming recession – Hatzius said it reflected and simultaneously validated “overly pessimistic” economic forecasts.
An inverted yield curve generally signals expectations that the Fed will cut rates to stimulate the economy. The Goldman Sachs economist said, however, there was a “plausible path” for the Fed to cut interest rates just because of lower inflation.
Hatzius said the U.S. central bank will most likely hike rates by another 25 basis points at its rate-setting meeting next week in what he expects will be the last hike of the current monetary tightening cycle.
