FX: Goldman Sachs downgrades the probability of a U.S. recession, expecting only one more rate hike this year

According to Jan Hatzius, Chief Economist at Goldman Sachs Group, recent positive data on economic activity and inflation suggest that,The U.S. economy is more likely to avoid a recession in the next 12 months。

Hatzius said Monday,The bank downgraded the probability of a U.S. recession starting in the next 12 months to 20 percent from a previous forecast of 25 percent.In a research note, he said: "Our main reason for lowering this forecast is that recent data have strengthened our confidence that the Fed does not need a recession to bring inflation down to an acceptable level."

Market expectations of a so-called "hard landing" - a situation in which the Federal Reserve's rate hikes tip the economy into recession - have recently been challenged by data showing a slowdown in consumer and producer price inflation in June, which could lead to more dovish monetary policy going forward.Mr. Hatzius cited "strong fundamental reasons" for expecting continued easing of inflationary pressures.

At the same time, economic activity has remained resilient despite a sharp rise in borrowing costs since the Federal Reserve began raising interest rates in early 2022. "We do expect some deceleration in the coming quarters, largely due to the sequential slowdown in real disposable personal income growth and the drag of reduced bank lending," Mr. Hatzius said, but the easing of financial conditions, a rebound in the housing market and a continuing boom in factory construction all point to continued growth, albeit at a slower-than-trend pace.

On the current inversion of the Treasury yield curve, often seen as a harbinger of an impending recession, Mr. Hatzius said it reflected and confirmed "overly pessimistic" economic forecasts.

An inverted yield curve usually signals expectations that the Federal Reserve will cut interest rates to stimulate the economy, but the Goldman Sachs economist said there was a "reasonable path" for the Fed to cut rates simply because of lower inflation.

Hatzius said,The Fed is likely to raise rates by another 25 basis points at next week's meeting, which he expects to be the last in the current monetary tightening cycle.