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"The main reason for our cut is that the recent data have
reinforced our confidence that bringing inflation down to an
acceptable level will not require a recession," he said in a
research note.
Market expectations of a so-called hard landing - a scenario in
which the Federal Reserve's interest-rate hikes tip the economy
into a recession - have been recently challenged by data showing
slowing consumer and producer price inflation in June. Slowing
inflation would likely lead to a more dovish monetary policy
going forward.
Meanwhile, economic activity has remained resilient, despite
significantly higher borrowing costs since the Fed started its
rate-hiking campaign in early 2022.
"We do expect some deceleration in the next couple of quarters,
mostly because of sequentially slower real disposable personal
income growth ... and a drag from reduced bank lending," Hatzius
said. However, he expected the economy to continue to grow,
although at below-trend pace.
With regards to the current inversion of the Treasury yield
curve - generally seen as a harbinger of an upcoming recession -
Hatzius said it reflected and simultaneously validated "overly
pessimistic" economic forecasts.
An inverted yield curve generally signals expectations that the
Fed will cut rates to stimulate the economy. The Goldman Sachs
economist said, however, there was a "plausible path" for the
Fed to cut interest rates just because of lower inflation.
Hatzius said the U.S. central bank will most likely hike rates
by another 25 basis points at its rate-setting meeting next week
in what he expects will be the last hike of the current monetary
tightening cycle.
(Reporting by Davide Barbuscia; Editing by Chizu Nomiyama)
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