Goldman Flag 15% Chance Of Recession In 12 Months, 35% Chance Over 24 Months

When it coms to engineering a soft landing, Goldman Sachs note that “the main challenge for the Fed will be to reduce the jobs-workers gap and slow wage growth to a pace consistent with its inflation goal by tightening financial conditions enough to reduce job openings without sharply raising unemployment. History suggests that this may be challenging, since large declines in the jobs-workers gap have only occurred during recessions in the U.S., although there are a few examples outside of recessions in other G10 countries.”

• “On the surface, past tightening cycles in the U.S. also suggest low odds of a soft landing, since eleven out of fourteen tightening cycles since World War 2 have been followed by a recession within two years. The silver lining is that only eight of these recessions can be even partially attributed to Fed tightening, and soft or “softish” landings have been more common more recently.”
• “Soft landings have been more common in other G10 countries, where 58% of tightening cycles avoided a recession for one year after the last hike, and 44% for two years. And although the odds of avoiding a recession for two years fall to just over 20% and the odds of avoiding a recession and reversing most of an inflation overshoot fall to just under 15% when core inflation has risen by as much as it has in the U.S. today, the odds of avoiding a recession rise to almost 80% when the private sector financial balance is as elevated as it has recently been.”
• “Taken at face value, these historical patterns suggest the Fed faces a hard path to a soft landing as it aims to narrow the jobs-workers gap and bring inflation back towards its 2% target. We still do not see a recession as inevitable, however, particularly since the FOMC's goal of cooling the economy while avoiding a recession will be helped by post-covid normalizations in labor supply and durable goods prices. Nevertheless, the historical G10 evidence suggests the odds of a recession are higher than normal, and we now assign roughly 15% odds to a recession in the next 12 months and 35% within the next 24 months.”