(Bloomberg) -- Goldman Sachs Group Inc (NYSE:GS) lowered its estimate of the odds of a US recession over the next 12 months to 25% based on waning banking-sector stress and the bipartisan agreement to suspend the nation’s debt limit.
The move reverses Goldman’s mid-March upgrade of recession probability to 35% after the collapse of Silicon Valley Bank.
“We have become more confident in our baseline estimate that the banking stress will subtract only a modest 0.4 percentage points from real GDP growth this year, as regional bank stock prices have stabilized, deposit outflows have slowed, lending volumes have held up, and lending surveys point to only limited tightening ahead,” Jan Hatzius, Goldman’s chief economist said in a note. Also, “the tail risk of a disruptive debt ceiling fight has disappeared.”
Goldman’s 2023 growth forecast is 1.8%. The consensus of forecasters surveyed by Bloomberg is 1.1%. It remains unclear whether Federal Reserve policy makers need to cause a recession to bring inflation — still over 4% — back to their 2% target, with the key factor being if the labor market can “rebalance smoothly,” said Hatzius.
Since March 2022, the US central bank has raised its policy rate at 10 consecutive meetings by a total of 5 percentage points, bringing its target-rate range to 5% to 5.25%
Fed officials at their June 13-14 meeting appear likely to signal additional interest-rate hikes ahead via their quarterly forecasts for the federal funds rate, Hatzius wrote. Goldman economists expect the US central bank to lift its policy rate by another 25 basis points, mostly likely in July, to a peak target rate range of 5.25% to 5.5%.
“Subsequently, we see a long pause of about a year, followed by very gradual cuts,” Hatzius wrote. “On a probability-weighted basis, we continue to think that the rates market is underpricing the outlook for the funds rate over the next 1 to 2 years.”