The resilience of the labor market and consumer spending to the Federal Reserve’s aggressive rate-hiking cycle likely means that the neutral rate – the level at which interest rates begin to weigh on the economy – is higher than during the last cycle, the firm noted in a report.
As a result, the Federal Reserve’s current benchmark rate is not high enough to trigger a recession, so the central bank is less likely to feel the need to cut the cost of credit, Goldman Sachs analysts wrote.
“Markets are less confident that the fall in inflation will be enough to trigger short-term cuts,” the financial group added.
A prolonged period of high rates will weigh heavily on the 50% of publicly traded companies that were unprofitable in 2022, the firm warned.
A wave of companies cutting costs, either by cutting spending or reducing workforce, could drag down payroll growth by about 20,000 jobs a month and shave 0.2% from GDP, Goldman Sachs estimated.
Rising interest rates could also raise the debt-to-GDP ratio from 96% to 123% in the next decade, according to the firm. However, he does not believe that the increase in debt will prompt a fiscal agreement in Washington in the short term.
“We believe that concerns about debt sustainability are unlikely to lead to a deficit reduction agreement in the near term due to congressional gridlock, a lack of political attention to deficit reduction, and the upcoming 2024 elections.” wrote Goldman Sachs.
“As none of the likely presidential candidates are focused on deficit reduction, it is unclear how much will change after the election,” he added.