After more than two years of collective hand-wringing on Wall Street over the possibility that the US economy can tank at the moment of news, Goldman Sachs has news: There is no better chance now of a recession than there is in any other normal situation. The bank’s economists over the weekend reduced the probability of a recession to just 15%, which was classified by chief economist Jan Hatzius as the “unconditional long-term average.” Smashing September’s nonfarm payrolls of 254,000 and the move down in the unemployment rate became a catalyst for the firm to almost abandon the chance of contraction. According to the Labor Department’s count, the upward shift in the unemployment rate has raised concerns that just as inflation is easing, a weak labor market poses a greater threat. “With nonfarm payrolls growth of 254k surprisingly up, the previous month revised higher, and household employment also hampered, we now estimate the underlying job trend of 196k, well above our pre-wage forecast of 140k and modestly above our estimated ‘breakeven. rate’ from 150-180k,” Hatzius wrote in a client note. “The result is that the underlying upward pressure on the unemployment rate may have ended through a combination of stronger labor demand growth and weaker labor supply growth (due to slower immigration),” he said. The move comes at a crucial time as the Federal Reserve ponders the next step in monetary policy. Ahead of the report, traders had been betting that the Fed could repeat its 50 basis point – half a percentage point – rate cut from September before the end of the year. But expectations have swung now, and Goldman concurs with the market price that “the next few meetings” will see a 25 basis point movement. “If Fed officials had known the next data, they would have voted for a 25bp cut on September 18. But that doesn’t mean the 50bp cut was a mistake,” Hatzius said, adding that the Fed was “late to start” cutting so that a bigger move would bring the fed funds rate closer to regulation. privacy about where it should stand given the current economic situation. Getting the calculus right is important from a market and Fed perspective. Despite expectations of a slower reduction in the near term, futures traders are still pricing in the fed funds rate in a range of 3.25% to 3.5% by the end of 2025, according to CME Group’s FedWatch gauge. This is about 1.5 percentage points lower than the current level and a full 2 ​​percentage points below the pre-September cut. However, if Goldman is correct and the scenario of a soft landing is unlikely, such rate cuts are unlikely and more consistent with a recession, not a sustained expansion. History suggests the Fed only cuts 125 basis points in total without an economic slowdown, said Lisa Shalett, chief investment officer at Morgan Stanley. The current market price for reducing monetary policy, may be ambitious. “You have to give,” Shalett said in a note, adding, “and stocks and bonds may be vulnerable if expectations are disappointed.”
Goldman cuts recession chances to just 15%
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