Goldman Sachs cuts recession odds to just 15%, says a September Fed hike is 'off the table'

Published Tue, Sep 5 20236:55 AM EDTUpdated Tue, Sep 5 202311:47 AM EDT

Goldman Sachs is out with some bold calls on the economy to start the holiday-shortened week, cutting the odds of a recession in the U.S. to just 15% and saying the Federal Reserve won't hike interest rates this month and could be done altogether. "The continued positive inflation and labor market news has led us to cut our estimated 12-month US recession probability further to 15%" from 20% prior, wrote Jan Hatzius, the bank's chief economist, in a note dated Monday . " We view Chair Powell's promise at Jackson Hole to 'proceed carefully' as a signal that a September hike is off the table and the hurdle for a November hike is significant." "On net, our confidence that the Fed is done raising rates has grown in the past month," added Hatzius. Friday's August jobs report basically showed an economy still growing, but not at a pace that would seem to cause the Fed to have to slam on the breaks. Nonfarm payrolls increased by a tame 187,000 and wages rose at a 4.3% pace. However, the unemployment rate ticked up a bit to 3.8%. Entering 2023, surging inflation, rising rates, a downtrodden stock market and an inverted yield curve had many prognosticators calling for a recession before the year was out. Instead, GDP has grown about 2% in the first two quarters, inflation has slowed and the Fed has recently begun treading more carefully with rate hikes, even pausing one month. Hatzius noted the consensus Wall Street recession probability is still 60%, citing a Bloomberg survey, putting Goldman in far more optimistic territory than the rest of the crowd. "There are some fundamental reasons to expect a deceleration in Q4, including the resumption of student loan payments and a near-term hit to housing from the recent increase in mortgage rates," wrote Hatzius. "But we expect the slowdown to be shallow and short-lived." The economist noted the strong labor market and growing wages transferring into higher disposable income growth as the main reason to remain optimistic. Goldman also said taking out certain distortions shows underlying inflation may already be close to the Fed's 2% desired target. Goldman doesn't believe the Fed will start cutting rates anytime soon, in part because the firm sees the economy remaining strong. Hatzius said the Fed would begin "very gradual" rate cuts starting in the second quarter of next year. The central bank next decides on rates Sept. 20. — CNBC's Michael Bloom contributed reporting.