After more than two years of collective worry on Wall Street about the possibility that the U.S. economy could suddenly go into trouble, Goldman Sachs announced today that a recession is now more likely than under any other normal scenario. Economists at the bank lowered the probability of a recession to 15% over the weekend, with chief economist Jan Hatzius classifying it as an “unconditional long-term average.” Nonfarm payrolls surged by 254,000 in September and the unemployment rate fell, acting as a catalyst for the company to almost give up on any chance of shrinking. The rising unemployment rate has raised concerns that a weak labor market is posing a greater threat at a time when inflation is slowing, according to the Labor Department. “With nonfarm payrolls rising sharply by 254,000, revised higher in previous months, and household employment holding steady, we now estimate underlying employment trend at 196,000, well above our pre-employment estimate of 140,000 and slightly above our estimated ‘breakeven’. He added: “The result is that fundamental upward pressure on the unemployment rate is likely to end through a combination of stronger labor demand growth and weaker labor supply growth (due to slower immigration). “The move comes at an important time as the Fed considers its next steps in monetary policy. Ahead of the report, traders had been betting that the Fed could repeat the 50 basis point (half-percentage point) increase from September before the end of the year. ) rate cut. But expectations have now shifted, with Goldman agreeing the market is pricing in a 25 basis point move “over the next few meetings.” “Had Fed officials known the follow-up data, they might have chosen to cut interest rates by 25 basis points on September 18,” Hatzius said. “But that doesn’t mean a 50 basis point cut was a mistake.” He added that the Fed “started late. “As a result, a larger rate cut would bring the federal funds rate closer to policy rules regarding current economic conditions.” Getting the calculation right is important from both a market and the Fed’s perspective. Although the pace of rate cuts is expected to slow in the near term, futures traders still price the federal funds rate at the end of 2025 in a range of 3.25% to 3.5%, according to CME Group’s FedWatch indicator. This is about 1.5 percentage points below current levels and 2 percentage points below the pre-September rate cut. However, if Goldman Sachs is right and a soft landing scenario is possible, then such a rate cut is unlikely and more consistent with a recession than a sustained expansion. Lisa Shalett, chief investment officer of Morgan Stanley, said that history shows that in an economic downturn, the Fed will only cut interest rates by a total of 125 basis points. Well, the market’s current pricing for monetary policy easing may be too ambitious. “Something has to give, and both stocks and bonds could become vulnerable if expectations fall through,” Shalet said in a note.
