The US economy looks increasingly like it can avoid recession despite the Fed's rate hikes, Goldman Sachs says

• Goldman Sachs said it's seeing encouraging signs that the Fed can pull off a soft landing for the US economy.
• The Fed has hiked rates hard since March to tackle inflation, raising fears that the US will tip into recession.

The US economy looks increasingly like it will avoid a recession despite the Federal Reserve's aggressive interest-rate hikes, according to Goldman Sachs.

Goldman's analysts, led by chief economist Jan Hatzius, said in a note Monday that there are "encouraging signs" that the Fed can engineer what has become known as a soft landing — that is, it can bring down inflation without major damage to the economy.

The Fed has hiked interest rates by 2.25 percentage points since March, in the most aggressive tightening cycle since the 1980s. The central bank's target interest-rate range stands at 2.25% to 2.5% after back-to-back 75 basis point increases.

Some economists have said the Fed's rate hikes — which are aimed at bringing down the strongest inflation for 40 years — will trigger a recession in the US. Goldman thinks there's a 33% chance of a mild US recession within the next 12 months.

Yet the investment bank said Monday that it was seeing positive signs from the economy. In particular, the investment bank said growth is likely to remain well below trend over the next year, but does not yet look overly worrying.

The bank's analysts said the recent fall in energy prices is starting to support people's incomes. That said, this is being balanced by a sharp slowdown in the housing market.

Goldman said there were also signs that the pressure on the labor market is easing. In particular, the increase in the number of people rejoining the labor force in July signals that the upward pressure on wages is likely to slow.

And the bank's analysts said the recent news on US inflation has been particularly encouraging.

"Sharply lower commodity prices, a stronger dollar, and large improvements in supply-chain disruptions all suggest that goods price inflation will continue to abate," they said.

They believe progress on inflation in the service sector is likely to be slower, given rents are running high. But they still see the rate of price rises slowing in the coming months.

Goldman expects a 50 basis-point interest rate rise from the Fed in September followed by two 25 basis-point moves in November and December. But its team noted there's a good chance the Fed could hike harder, given officials' recent focus on quickly taming inflation.