The economists’ outlook has featured “subdued” growth and “some softening” in the labor market for months now, but after the recent banking instability, headlined by the second and third largest bank failures in U.S. history, they’ve become even more pessimistic.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the FOMC minutes summary states.

Despite the bearish forecast from the Fed, Goldman Sachs’ chief economist and head of global investment research, Jan Hatzius, said Wednesday after the release of the minutes summary that he still believes the U.S. economy can avoid a recession. Hatzius sees just a 35% of a U.S. recession over the next 12 months. That’s up from the 25% he had forecast prior to the recent bank failures, but still “far below” Wall Street’s 65% consensus and the view of the Fed’s staff.

Still, some economists contend that even if recent banking stress doesn’t push the economy into a recession in the near term, the Fed will still have to spark one if it wants to bring inflation back to a 2% target durably. But does it really?

“We don’t think so,” Hatzius wrote in a Wednesday research note, arguing the latest data has “confirmed” inflation is still slowing. “This is a reassuring development following the upside surprises of early Q1,” he added.

To his point, year-over-year inflation, as measured by the consumer price index (CPI), fell to 5% in March, and has steadily declined since its 9.1% four-decade high last June. And the Fed’s favorite inflation gauge, the personal consumption expenditures (PCE) index, sank to 5% in February as well, down from its June high of roughly 7%. March’s PCE data will be released on April 28. 

Hatzius noted that there has also been “particularly encouraging” news from the labor market recently that gives him faith inflation will continue to fall. For over a year now, the Fed has maintained that the labor market needs to cool in order for inflation to fade, and to ensure that cooling, most economists argue the unemployment rate must rise substantially—but not Hatzius.

Goldman’s chief economist has argued since last year that if the “jobs-workers gap”—the difference between the total number of jobs and the number of workers in the economy—narrows sharply, then that could be enough to reduce inflation to the Fed’s 2% target without the need for significant job losses.

Last March, when the jobs-workers gap hit a record 5.9 million, Hatzius said it was evidence the U.S. was experiencing its “most overheated” and unbalanced labor market in the postwar period. He warned that if it persisted, wages would rise and boost inflation, making the Fed’s job even more difficult. And that’s what happened most of last year, but now a new trend has emerged.

The number of available jobs in the U.S. declined to 9.9 million in March from a high of over 12 million last June, according to the latest JOLTS data. Hatzius said this has pushed the jobs-workers gap “at least halfway back” to its pre-pandemic levels. And he noted that wage growth is also trending toward a 3.5% pace that is “consistent with the Fed’s inflation target.” 

The good news is all of this labor market cooling is happening while the combination of higher labor force participation and increased immigration has allowed the unemployment rate to remain near a historic low of 3.5%.

“As we noted late last year, this cycle is different from prior high-inflation periods in ways that should continue to make it much easier to bring down inflation without a recession,” Hatzius said, noting that “labor markets should prove much easier to rebalance via reduced job openings and without a large—or perhaps, any—hit to employment.”

While Hatzius doesn’t expect a U.S. recession this year, that doesn’t mean the economy won’t slow. Goldman is forecasting U.S. GDP growth will fall to just 1.3% in 2023. “Major economies need a landing from the post-COVID inflation surge,” Hatzius explained, but “we expect it to be mostly soft.”