- There's a 35% chance the US slips into a recession within a year, Goldman Sachs' Jan Hatzius said.
- The Federal Reserve looks to be successfully balancing the labor market and taming inflation, he said.
It's still reasonably unlikely that the US slips into a recession within a year despite soaring inflation and the Federal Reserve's aggressive tightening campaign, according to Goldman Sachs' chief economist.
Jan Hatzius said in a recent research note that there's just a 35% chance that the US suffers a recession within 12 months – making him significantly more optimistic than most economists.
A recent Wall Street Journal forecaster survey placed the likelihood of a recession within a year at 63%, while Bloomberg Economics model projections now say a recession is 100% likely to happen in 12 months.
Many of the economists surveyed by those two outlets believe that the Fed will have to trigger a recession through aggressive interest rate hikes to curb soaring prices, while the war in Ukraine and escalating tensions between the US and China are also weighing on growth.
A 35% recession chance "is more than double the unconditional probability in any given 12-month period because inflation is far above target, the Fed is tightening aggressively, and we live in an exceptionally uncertain world in terms of both US politics and geopolitics," Hatzius said Monday.
But the bank's top economist remains confident that the Fed can tame inflation while avoiding a recession through what he called "a very plausible non-recessionary four-step path from the high-inflation economy of the present to a low-inflation economy of the future".
For the Fed to avoid pushing the US into a recession, Hatzius said the central bank would have to succeed in:
- "Bringing growth down to below-trend but positive rates"
- "Rebalancing the labor market with only a limited increase in unemployment"
- "Reducing wage growth to more sustainable levels"
- Put the Fed's favored inflation gauge, the Personal Consumption Expenditures price index, "on a path back down to 2%"
The US's gross domestic product (GDP) grew 2.6% year-on-year in the third quarter of 2022, meaning the Fed still has some space to hike interest rates without pushing aggregate demand into negative territory.
Hatzius said Friday that the latest data showed the Fed is succeeding on both the second and third steps he highlighted, cooling both the white-hot labor market and surging wage growth.
"There has been a deceleration in employment growth as we've gone through the year, from extremely strong rates of job growth to merely strong rates of job growth," he told CNBC's 'Squawk on the Street'.
"The other thing to focus on is the wage numbers," Hatzius added. "If you look at different indicators of wages more broadly, there's been a deceleration in wage growth – and that's what the Fed will need to see because they're worried wages are growing at an unsustainable pace."