Higher-for-longer rates of interest will likely shave 0.5% from U.S. economic growth and will force unprofitable public corporations to start cutting their workforce, strategists at Goldman Sachs wrote in a note on Sunday.
Short-term bonds have hovered near 17-year highs as U.S. jobs growth continues to suggest strength within the economy.
The resilience of the labor market and consumer spending within the face of the Federal Reserve’s aggressive rate mountaineering cycle likely implies that the neutral rate — the extent at which rates of interest begin to weigh on the economy — is higher than it was throughout the last cycle, the firm noted.
Because of this, the Fed’s current benchmark rate isn’t high enough currently to cause a recession, making the central bank less prone to feel the necessity to cut rates, Goldman Sachs analysts wrote.
“Markets have turn out to be less confident that falling inflation might be enough to prompt cuts anytime soon,” the firm wrote.
An prolonged period of high rates will weigh heavily on the roughly 50% of publicly traded firms that were unprofitable in 2022, the firm warned.
A wave of firms cutting costs through either reduced spending or declining headcount could create a 20,000 a month drag on payroll growth and slice 0.2% from GDP, the firm estimated.
The Federal Reserve’s current benchmark rate isn’t high enough currently to cause a recession, Goldman Sachs analysts wrote.REUTERS
Higher rates can even likely push the U.S. debt-to-GDP ratio from 96% to 123% over the subsequent decade, the firm said.
Yet it doesn’t see rising debt levels prompting a fiscal agreement in Washington within the short-term.
“We expect it’s unlikely that concern about debt sustainability will result in a deficit reduction agreement anytime soon due to congressional gridlock, an absence of political attention to deficit reduction, and the upcoming 2024 election,” the firm wrote.
“And with neither of the likely presidential nominees focused on deficit reduction, it’s unclear how much will change after the election.”
