The Federal Reserve is tapping the brakes on U.S. economic growth, which could help bring down inflation and temper the most overheated job market in postwar American history, according to Goldman Sachs Research.
As inflation surges, the U.S. central bank has taken a more hawkish stance this year. That’s part of the reason Goldman Sachs’ Financial Conditions Index has tightened by about 100 basis points since April, which is forecast to be enough to reduce the growth in gross domestic product by about 1 percentage point. Goldman Sachs Research now expects U.S. economic growth of 2.4% this year on an annual basis (versus 2.6% previously) and 1.6% in 2023 (versus 2.2%).
“We now think the rate hikes that are currently priced into financial conditions are in the ballpark of what is ultimately needed to restore balance to the labor market and cool wage and price pressures,” Goldman Sachs economists wrote in a report on May 15. The Fed has raised its funds rate twice this year and is currently targeting a range of 0.75% to 1%. Goldman Sachs economists expect that rate to reach 2.5% to 2.75% in 2022 and a range of 3% to 3.25% the following year.
The slowdown in economic growth is likely to lower job openings and, eventually, increase the unemployment rate a bit, as openings typically only decline when the jobless rate spikes during a recession.
Even so, economists at Goldman Sachs are optimistic that a sharp increase in unemployment can be avoided: job openings fall more, and the jobless rate less, when openings are high — as they are now. In addition, the overshoot in openings is focused in industries where openings tend to be more sensitive to a tightening in the Financial Conditions Index.
The sheer momentum in the U.S. job market is forecasted to push the unemployment rate down to 3.4% in the coming months, compared with 3.6% in April, according to Goldman Sachs Research. That rate is expected to increase to 3.5% by the end of this year and to 3.7% by the end of 2023.
The Fed isn’t the only reason the job market is expected to cool. The labor supply is forecast to increase because of the end of unemployment insurance benefits and other fiscal transfers and as COVID-related health concerns fade.
Those factors are expected to increase the labor supply by as much as 1.5 million in the next year, helping close the current jobs-workers gap of about 5.6 million. There are also tentative signs that increases in wages and prices are decelerating — all of which could help Fed policy makers achieve their inflation target of 2%.