The chief economist of the entity, Jan Hatzius, detailed in a report published by Bloomberg that the problem facing the U.S. is not inflation itself, but the response applied by the Federal Reserve to curb the escalation of prices.
According to Goldman Sachs, the US central bank faces the very difficult task of tightening monetary policy without triggering unemployment, which would push the economy into recession.
While inflation affects large and small economies alike due to the rising cost of raw materials, in the United States the labor market is extremely tight due to the fact that there is a huge supply and little demand, leaving thousands of job offers vacant. This situation forces employers to raise wages and pass on the costs to consumers.
Dealing with this labor market is, according to Jan Hatzius, the Federal Reserve’s main challenge. According to the economist, it must reduce the gap between employment and workers, and thus curb wage growth to keep inflation close to the 2% target.
This would be achieved by tightening financial conditions enough to reduce job offers, but with a certain balance so as not to sharply increase unemployment.
A difficult journey
Goldman’s chief economist raises the probability of recession over the next two years to 35% because he sees it difficult for the Fed to achieve that perfect balance, and he is hesitant because history dictates it.
Jan Hatzius cites that 11 of the last 14 inflation tightening cycles in the United States have resulted in a recession in the next two years. Although, the expert acknowledges that in only eight of those processes did the crisis stem from U.S. central bank policy.
“Taken at face value, these historical patterns suggest that the Fed faces a tough road to a soft landing,” Hatzius wrote.
Though he added that as the pandemic fades from Americans’ daily lives, labor market tensions and consumer goods prices should ease, bolstering the economy over the next two years and reducing the likelihood of a crisis.
Goldman is not alone
This month has seen a succession of surveys predicting a US recession in the medium term.
A Bloomberg survey of economists in the first week of April found that 27.5% expect a recession, up from 20% of respondents the previous month.
Another poll in The Wall Street Journal pointed in the same direction earlier in the month. Twenty-eight percent of the 65 experts surveyed expect a recession 12 months from now, up from 18% in January and 12% a year ago.