Goldman Sachs and Federal Reserve officials suggest that a significant rise in unemployment, rather than inflation or tariff effects, could prompt the Federal Reserve to cut interest rates. Goldman strategist Dominic Wilson emphasizes that any notable upward pressure on unemployment will likely lead the Fed to act decisively. Despite a temporary reprieve from economic recession due to a pause in mutual tariffs, underlying risks persist, with uncertainties in policy, low consumer and business confidence, and stagnant income growth posing threats to the U.S. economy.
Goldman Sachs predicts that a recession could lead the S&P 500 index to fall to around 4600, with high-yield bond spreads potentially exceeding 600 basis points and short-term Treasury yields dropping below 3%. The Fed remains in "recession watch" mode, with trade and fiscal policy uncertainties complicating decisive action.
Federal Reserve Vice Chair Christopher Waller supports this view, highlighting the labor market as a key variable. He notes that tariffs could quickly increase unemployment, with the Fed focusing on the speed of its rise rather than absolute levels. This aligns with economist Javier Bianchi's view that tariffs act as a negative demand shock, supporting expansionary monetary policy to mitigate economic downturns.
