As the Federal Reserve aggressively hikes interest rates, the question of whether the U.S. economy can stave off a recession has become a hot topic of debate this year.
Recent resilient U.S. economic data has prompted many Wall Street investment banks to shift their stance from late last year, with most now doubting a looming recession. Major players like Bank of America, JPMorgan Chase, and Goldman Sachs have all reduced their predictions of the U.S. economy entering a recession. Goldman Sachs recently slashed its recession probability to a mere 15%, down from its July prediction of 20%, citing cooling inflation and a resilient labor market as indicators that the Fed might not need to hike rates further.
Goldman's Hatzius: U.S. Recession Probability Now at 15%
Goldman Sachs' Chief Economist, Jan Hatzius, in a recent research report, highlighted two main points:
- With continued robust employment growth and rising real wages, real disposable income is expected to accelerate again in 2024.
- He strongly disagrees with the notion that the 'long and uncertain lag' of monetary policy will push the economy into a recession.
Hatzius believes that the economic drag from tightening policies will continue to diminish and will be "completely gone by early 2024." His growth expectations for the U.S. economy are more optimistic than many of his Wall Street peers, with a Bloomberg survey previously showing a 60% probability of a recession. Hatzius projects an average U.S. economic growth rate of 2% by the end of 2024.
Furthermore, Hatzius noted that a rate hike by the Fed in September is "not on the table," and there are significant hurdles for a November rate hike. He believes the Fed might not need to hike rates further but is unlikely to shift to a more dovish stance unless growth slows more than expected.
Fidelity's Ahmed: 60% Chance of U.S. Recession Due to Fed's Rate Hikes
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, recently expressed concerns that despite the U.S. economy's apparent strength, continuous rate hikes by the Fed could still lead to a recession.
Ahmed pointed out that as corporate bonds mature in the coming years, the economy might take a hit. Companies that previously secured low-cost financing will now face higher interest rates when refinancing.
He emphasized that the current cycle will eventually lead to a recession as the effects of interest rate shocks begin to manifest. If the Fed doesn't relent on its tightening stance, everyone will have to deal with higher real interest rates.
Fidelity's data indicates that about a quarter of U.S. investment-grade bonds will mature between 2023 and 2025. This means that businesses that borrowed at low costs before the current rate hike cycle might face significantly higher refinancing costs in the current high-interest-rate environment.
Bearish Rosenberg: U.S. Will Face Recession in Six Months Unless a Miracle Happens Prominent economist and former Merrill Lynch North America Chief Analyst, David Rosenberg, believes that the effects of the Fed's rate hike cycle haven't fully manifested and that the U.S. economy is swiftly heading towards a recession.
Rosenberg, in a recent interview, discussed the bleak economic outlook for the U.S., the Fed's policies, credit card debt issues, and comparisons to the 2008 scenario.
He emphasized that the Fed's 11 rate hikes represent one of the most aggressive tightening cycles in history, which isn't a good sign for the months ahead.
Rosenberg also touched upon the issue of U.S. credit card debt, stating, "We've just replaced subprime mortgages from 15 years ago with credit card debt." While it's not on the scale of the 2008 housing mortgage crisis, it's not insignificant.
He concluded by saying that those calling for a recession need to be a bit more patient. The situation is masked by all the fiscal stimulus measures, but these are temporary, and their expiration is essentially starting this month and the next.
