The US economy will likely endure an extended slump, and the Federal Reserve may hike interest rates above 4.5%, Goldman Sachs CEO David Solomon has warned.
“There is no question that economic conditions are going to tighten meaningfully from here,” the bank chief said at the Future Investment Initiative in Saudi Arabia on Tuesday. “The US is most likely going to have a recession.”
Inflation skyrocketed to a 40-year high of 9.1% in June and remained above 8% in September. The Fed has tried to tame inflation by hiking rates from nearly zero in March to a range of 3% to 3.25% today.
The US central bank has signaled it will hike them to 4.5%, then halt to allow those increases to take full effect, Solomon said. Nonetheless, the Fed might not stop there if demand doesn’t delay and the labor market remains extremely tight, he added.
“If they don’t see real changes in behavior, my guess is they’ll go further,” he said. “Generally, when you find yourself in an economic scenario like this, where inflation is embedded, it’s very hard to get out of it without a real economic slowdown.”
Solomon highlighted the dramatic shift in the monetary policy currently underway, after roughly 40 years of the Fed keeping rates low and buying government bonds to stimulate the economy, without having to worry about inflation.
“We’re now in the process of unwinding a multidecade period, and there are consequences to that,” he said. “There aren’t easy answers. There’s no silver bullet.”
The Goldman chief issued a cheerless economic outlook earlier this month, prompting Amazon founder Jeff Bezos to voice his agreement.
“In the distribution of outcomes, there’s a good chance we could have a recession in the United States,” Solomon said.
“Yep, the probabilities in this economy tell you to batten down the hatches,” Bezos responded.