Outlook for a Recession: Goldman Sachs Remains Optimistic

Economists have been raising concerns about a potential recession in the coming year, citing the impact of the Federal Reserve's 11 consecutive interest rate hikes over the past two years. However, Jan Hatzius, chief economist at Goldman Sachs, begs to differ.

In an interview with CNBC on Wednesday, Hatzius expressed his belief that "the biggest negative impact is already behind us." While the lagged effects of prior rate hikes have been a point of contention among Fed officials, Hatzius aligns himself with those who believe that the bulk of these effects have already been absorbed by the economy.

Goldman Sachs, in their latest outlook, supports this view. Their economists estimate that the majority of the drag on GDP growth resulting from the Fed's tightening cycle took place in 2022 and early 2023. Although a recent uptick in long-term interest rates has extended the drag on growth by a couple of quarters, Goldman Sachs predicts that these effects will soon dissipate entirely.

One key point highlighted by Goldman Sachs is that the lags between tightening and GDP growth are actually shorter than commonly believed. This is because the countdown starts when markets anticipate a tightening. Hatzius emphasized his optimism about the future, noting that this year demonstrated that inflation can be brought down without causing harm to the economy.

He pointed out that the continued growth in real disposable household income will support consumers going forward. Hatzius also shared his expectation that the Fed won't take any action until the fourth quarter of 2024, potentially pushing any rate changes beyond the upcoming presidential election.

The reason for this delay, according to Hatzius, is that inflation is projected to remain slightly above 2%. However, he did mention that if the economy encounters an unexpected hurdle, the central bank may consider cutting rates earlier than anticipated.