Goldman Sachs’ economists now see an increased risk of a U.S. recession. “We are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” they explained.

Goldman Sachs on Increased Risk of Recession

Goldman Sachs’ economists, led by chief economist Jan Hatzius, explained in a note Monday that the global investment bank has cut its growth forecasts for the U.S. economy, warning that the risk of a recession is rising, Bloomberg reported.

The Goldman Sachs economists wrote:

We now see recession risk as higher and more front-load.

“The main reasons are that our baseline growth path is now lower,” they added. “We are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply.” Last week, the Federal Reserve approved its biggest interest-rate hike since 1994.

The Goldman research team now sees a 30% probability of the U.S. economy entering a recession over the next year, up from 15% previously. In addition, the firm sees a 25% conditional probability of a recession in the second year if one is avoided in the first. That implies a 48% cumulative probability in the next two years versus 35% previously, the publication conveyed.

In April, Hatzius told clients that the firm estimated “the odds of a recession as roughly 15% in the next 12 months and 35% within the next 24 months.”

“What might a recession look like?” the Goldman economists continued. “With no major imbalances to unwind, a recession caused by moderate overtightening would most likely be shallow, though even shallower recessions have seen the unemployment rate rise by about 2.5 percentage points on average.”

They cautioned:

One additional concern this time is that the fiscal and monetary policy response might be more limited than usual.

Early this month, Goldman Sachs President and COO John Waldron warned of unprecedented economic shocks and tougher times ahead. In May, Senior Chairman and former CEO Lloyd Blankfein advised companies and consumers to prepare for a U.S. recession.

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