Goldman Sachs economists have warned that the likelihood of the US economy plunging into a recession in the next year has increased dramatically in the wake of the Russia-Ukraine war.
Economists, led by Jan Hatzius, have cut their economic growth forecasts this year to 1.75% from 2.0% and noted that such a prospect means that there is a “higher risk” of around 20%. % and 35% that the United States enters a recession next year.
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“Although our baseline forecast assumes that further reopening of the services sector and spending from excess savings will keep real GDP growth positive in the coming quarters, the uncertainty about the outlook is higher than normal,” they wrote in the report. Thursday’s analyst note. “We believe the risks of a recession are broadly in line with the 20-35% odds currently implied in models based on the slope of the yield curve.”
The downgrade comes after the Labor Department reported consumer prices rose 7.9% in February, the fastest pace since January 1982, when inflation hit 8.4%. Consumers are paying more for daily necessities, including grocery shop, gas And cars.
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The jaw-dropping reading – which marked the ninth consecutive month that the indicator has been above 5% – has increased the pressure on Federal Reserve charting a more aggressive course in the normalization of monetary policy.
The central bank announced Wednesday that it will raise interest rates for the first time in three years as policymakers, raising the benchmark fund by 25 basis points and ending the ultra-easy monetary policy it put in place two years ago to support the economic during the coronavirus pandemic.
Rising interest rates tend to create higher rates on lending to consumers and businesses, which slows the economy forcing them to cut spending.
The take-off of the rate, which puts the federal funds reference rate in a range of 0.25% to 0.5%, is likely only the beginning of a series of increases aimed at curbing uncontrolled inflation.
New economic projections released after the meeting show that policymakers were expecting six more hikes of similar size over the course of 2022 after consumer prices hit a 40-year high. It marks a notable change from just six months ago, when half of central bankers believed interest rate hikes weren’t justified until at least 2023. Fed officials also expect inflation to remain high, closing 2022 at 4.3%, far above the Fed’s annual target of 2.3%.
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During his post-meeting press conference, however, President Jerome Powell downplayed broader economic concerns over war and tightening aggressive politics.
“The likelihood of a recession in the next year is not particularly high,” Powell told reporters, citing the strong job market, solid wage growth, and strong corporate and household balance sheets. “All the signs are that this is a strong economy and that it will be able to thrive in the face of less accommodative monetary policy.”