Goldman Sachs reduced the projection that the US will enter a recession in the next 12 months

Goldman Sachs chief economist Jan Hatzius said on Monday the bank was cutting its probability of a US recession starting in the next 12 months to 20%.from a previous forecast of 25%.

“The main reason for our cut is that recent data has strengthened our confidence that a recession will not be necessary to bring inflation down to an acceptable level.”he said in a research note.

Market expectations of a “hard landing” (in which the Federal Reserve raises interest rates sends the economy into recession) have recently been called into question by data on slowing consumer price inflation and to the producer in June.

The slowdown in inflation would likely lead to more dovish monetary policy in the future. Furthermore, economic activity has been holding up, despite significantly higher borrowing costs since the Fed launched its rate hike campaign in early 2022.

“We expect some slowdown in the next two quarters, mainly due to the sequential slowdown in real personal disposable income growth (…) and the drag from the reduction in bank loans,” Hatzius said. However, he expects the economy to continue growing, albeit at a slower than trend rate.

As for the current inversion of the Treasury yield curve, generally seen as a harbinger of a coming recession, Hatzius said it both reflected and validated “overly pessimistic” economic forecasts.

An inverted yield curve usually indicates expectations that the Fed will lower rates to stimulate the economy. The Goldman Sachs expert said, however, that there is a “plausible path” for the Federal Reserve to cut interest rates just because inflation falls.

Hatzius added that the US central bank will most likely raise rates another 25 basis points at its policy meeting next week, in what he expects to be the last hike in the current tightening cycle.