The U.S. economy is standing in a precarious position: demand is soaring, inflation is growing and the Federal Reserve is raising interest rates while trying to avoid increasing unemployment. Economists at investment bank Goldman Sachs warn that these factors increase the chances of tipping the economy into recession. 

On Monday, analysts at Goldman Sachs told clients that the near-term risks of seeing a recession in the next two years are high and they should be prepared for the possibility. Recent hawkish signals from the Fed are at the center of this warning.

“As a result, we now see the odds of a recession as roughly 15% in the next 12 months and 35% within the next 24 months," said Goldman Sachs chief economist Jan Hatzius.

The Fed raised rates for the first time since the COVID-19 pandemic began in March when it hiked rates by a quarter of a percentage point. After inflation rose again in the weeks after the rate hike, Fed Chairman Jerome Powell promised more aggressive action to tame inflation. 

“If we think it’s appropriate to raise [by a half point] at a meeting or meetings, we will do so,” Powell said on March 21. “If we determine that we need to tighten beyond common measures of neutrality and into a more restrictive stance, we will do that as well."

To that end, the Fed has laid out plans to trim its nearly $8 trillion balance sheet. On April 6, Fed officials suggested that they may begin efforts to offload the balance sheet by their next meeting that starts on May 4. 

A recession is defined as a significant decline in general economic activity, usually across two consecutive quarters of decline in gross domestic product (GDP). They usually accompany a rise in unemployment and a decrease in manufacturing activity.

In the case of the U.S. economy, unemployment has remained low but inflation has grown as manufacturing has fallen. Supply chain disruptions over the war in Ukraine and COVID-19 lockdowns in China have also threatened more pain.

Goldman Sachs is not alone in predicting that the U.S. may be at the edge of recession. A poll from Reuters, conducted between April 4 to April 8 found that one in four economists expect the U.S. to enter a recession this year. A recent survey by the Wall Street Journal found that about 28% of economists said that they expect to see a recession within the year.