Goldman Sachs’ Jan Hatzius isn’t counting on the Federal Reserve cutting rates next year, and that’s because the economy will most likely avoid a recession in 2023, he told CNBC’s “Squawk on the Street” on Wednesday.
“We’re not looking for cuts, because we’re not looking for a recession,” the chief economist said, pegging the recession odds at 35% and below consensus estimates. “Our expectation, or baseline, is that the economy continues to grow and the adjustment process in the labor market continues, but without a recession.”
He pointed to two pockets of strength in the economy supporting this view. Real household disposable income, despite declining earlier this year, is growing as headline inflation moves lower.
Financial conditions have already tightened significantly, and the lags from those rate hikes are likely already underway, Hatzius said. To be sure, the impact on activity could take a few quarters, but the effect on growth is relatively short, he added.
In 2023, Hatzius expects a deflation in goods, with service inflation likely taking longer to decelerate. Markets have already begun to see relief in the housing and rental market, although those signs have yet to make their way into the consumer price index, he said.
“If GDP is still growing at a 1% pace, which is kind of our forecast over the next few quarters, then payroll growth slows substantially further but still stays positive,” he said. “Obviously, month to month, there is going to be more volatility around that, but we don’t have trend declines.”
— Samantha Subin