Goldman Sachs Group has said the US economy is likely to be “fairly bad” or “very bad” over the next six to nine months.
“We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief US economist at the company, wrote in an e-mail to clients. “A fairly bad one in which the economy grows at a 1 1/2 per cent to 2 per cent rate through the middle of next year and the unemployment rate rises moderately to 10 per cent, and a very bad one in which the economy returns to an outright recession.”
The Federal Reserve will probably move to spur growth as soon as its next meeting on November 2-3, Hatzius said. Expectations for central bank action have already led to lower interest rates, higher stock prices and a weaker dollar, according to Goldman, one of the 18 primary dealers that are required to bid at government debt sales.
Fed Chairman Ben S Bernanke and his fellow policy makers are debating whether to increase Treasury purchases to spur the US economy by keeping borrowing costs low. US five-year yields dropped to a record 1.1755 per cent today amid signs the recovery is losing momentum.
The “fairly bad” outlook for slow growth and rising unemployment without a recession will probably be the one that occurs, the e-mail said.
Renewed recession
Hatzius’ note reiterated comments he made yesterday at a forum in Washington, when he placed the odds of a renewed recession at 25 per cent to 30 per cent. He told reporters that was up from 15 per cent to 20 per cent at the start of the year.
Another $1 trillion of asset purchases by the Fed would probably lower long-term interest rates by about 0.25 percentage point, adding a “few tenths of additional GDP growth,” he said yesterday.
The Fed bought $1.7 trillion worth of Treasury and mortgage debt in a program that ended in March. The purchases helped push mortgage rates to historic lows.
New York Fed President William Dudley, the Boston Fed’s Eric Rosengren and Chicago’s Charles Evans have all advocated further Fed action.
Bernanke said on October 4 that restarting large- scale asset purchases would probably spur growth, after saying last week the central bank has a duty to aid the economy as unemployment holds near 10 per cent.
Investors forecasting Fed purchases pushed two-year Treasury yields to a record low of 0.3987 per cent on October 4. The Standard & Poor’s 500 Index rose 2.1 per cent yesterday to the highest level since May.
The Dollar Index, which IntercontinentalExchange Inc uses to track the greenback against the currencies of six major US trading partners, slumped 0.9 per cent yesterday to the lowest since January.
