Jan Hatzius, the chief economist at Goldman Sachs, said during a conversation with media representatives that the soft landing, which was perceived as something like a fantastic scenario for the Federal Reserve System, is still on track.
According to the mentioned expert, currently, the economic system of the United States is not close to recession. At the same time, Jan Hatzius noted that the inflation rate in the country in the current year turned out to be higher than the preliminary expectations regarding the dynamic of the corresponding process.
According to the expert, the flow of news about the process taking place in the space of the economic system of the United States is still very positive. In this case, information for the last year is meant. Jan Hatzius says that during the mentioned period, the inflation rate in the United States has decreased significantly. In this context, the economist drew special attention to the fact that the specified dynamic was fixed without prejudice to activity, which is a very important circumstance. Mr. Hatzius said that the United States economy was not in the zone of the recession scenario and was not close to this state of affairs.
As part of its efforts to combat inflation, the Fed launched a strategy for intensive interest rate increases in 2022 and 2023. The previous experience of aggressive actions by the financial regulator was realized in the 1980s when the central bank of the United States was headed by Paul Volcker.
Against the background of the rapid increase in interest rates, fears have been formed that this strategy could provoke an increase in unemployment and stop the process of restoring the economic system after the coronavirus pandemic. In the context of the corresponding sentiments, some kinds of scenarios of total collapse gradually began to emerge. In the autumn of 2022, in the format of a public discourse on economic issues, an opinion was formed that in the next 12 months, the recession scenario will be realized with a 100% probability. It is worth noting that this point of view on the prospects of the dynamic of the economy of the United States did not become absolutely dominant, but at that time other assessments of the future were also not optimistic and contained what can be described as deep pessimism.
Currently, it is widely believed in the expert community that a soft landing is the most likely scenario. Proponents of this point of view justify their vision of the future by such factors of the present as the sustainability of consumer spending, which exceeded forecasts, and the stable situation in the labor market, which turned out to be better than expected.
Jan Hatzius speaks of his confidence that the United States economic system will not face recession as a kind of new reality over the next 12 months. In his opinion, the probability of the downturn is 15%. This indicator is an average risk, which is fixed during periods when the economic situation is far from crisis.
Optimistic expectations may come as a relief to those in the White House who are trying to sell voters on the economic message of the President of the United States Joe Biden. The materialization of the risk of recession may cause the collapse of these efforts.
Data from the Washington-based TD Cowen Research Group shows that since 1900, all five presidents of the United States who ran for re-election have lost amid an economic downturn. In this case, William Howard Taft, Herbert Hoover, Jimmy Carter, George H.W. Bush, and Donald Trump are mentioned.
Jan Hatzius says there is a high probability that inflation in the United States will decrease sufficiently by June for the central bank to begin implementing a policy to cut interest rates. If this assumption becomes a reality, the high borrowing costs will decrease. In this case, for example, the burden of car loans will be eased. In this context, actualizes the question such as is now a good time to buy a car. Also, a decrease in interest rates will be a factor of positive impact on the financial condition of those who have mortgage loans. Credit card holders will also be positively affected by the likely new Fed policy.
The financial regulator can accelerate the process of lowering interest rates if the labor market, demonstrating now what can be called a force of historical magnitude, will turn on a downward trajectory. The hiring rate in the United States is showing stability. At the same time, unemployment in February was recorded at 3.9%. In July last year, this figure was 3.5%, which is a historical low.
Jan Hatzius says that the unemployment rate, confidently approaching 4%, may cause unrest among Fed officials. If this scenario is implemented, the financial regulator’s movement towards lowering interest rates is likely to accelerate.
The risk of recession is currently low, but the contingency factor as a kind of the axiom of the being cannot be canceled. At some point, changes may occur that transform the state of affairs.
Jan Hatzius says that in the context of possible factors impacting the fortune of the United States economy, the greatest cause for concern is contained in the space of geopolitics. According to him, there is currently no stability at the global level. The economist also mentioned military conflicts and the growing tension in relations between Beijing and Washington. At the same time, he underlined that there are unknown components in the formula for predicting the future.
Speaking about the coronavirus, Jan Hatzius said that the shock that occurred four years ago was the most extreme version of the unknown observed in recent decades.
One of the potential risks to the United States economy is empty office buildings in the $20 trillion commercial real estate market. This problem is largely related to the coronavirus pandemic and the scaling of the remote work format.
Jan Hatzius, like Fed Chairman Jerome Powell, doesn’t think empty office buildings will become a significant negative impact factor, like toxic mortgages in 2008. According to him, office construction has a relatively small share in the structure of the United States economy. Also in this context, Jan Hatzius stated his expectations that this problem will be solved within a few years. In his opinion, there is no basis for a recession in this case.
As we have reported earlier, JPMorgan CEO Says About Probability of US Recession.
