This risk might have gotten a little higher recently. It’s becoming clear that shelter and health care inflation will probably stay uncomfortably high throughout 2023, even if the labor market rebalances effectively.
Since shelter and health care have a big impact on commonly used measures of inflation, our colleagues see some risk that the Fed could focus too much on these lagging indicators, grow impatient with stubborn overall inflation numbers or tighten too quickly to see the full impact of their actions on the economy. Unfortunately, any of these responses have the potential to push us into a recession.
With so much uncertainty around the globe, this risk is likely somewhat higher than usual. Our Research colleagues doubt the slowdown in global GDP is enough to tip the US into a recession, but it’s hard to predict the impact of potential disturbances from international markets.
TL;DR: Goldman Sachs economists still see only a 35% probability of a recession over the next year, and think any recession would likely be mild. They are particularly skeptical of the common view that Fed rate hikes of the size expected, or even a little larger, will be enough to cause a recession.
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