Goldman CEO David Solomon warns a US recession is very likely – and says the Fed could hike rates above 4.5%

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David Solomon
Goldman Sachs CEO David Solomon.

  • Goldman Sachs CEO David Solomon said the US economy is likely to tumble into a recession.
  • He warned Tuesday the Federal Reserve could hike rates above 4.5% if the inflation threat persists.
  • The first big shift in monetary policy for four decades was bound to be disruptive, Solomon said.

The US economy will probably suffer a prolonged downturn, 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 surged to a 40-year high of 9.1% in June, and remained above 8% in September. The Fed has tried to curb further increases by lifting rates from nearly zero in March to a range of 3% to 3.25% today.

The US central bank has signaled it will raise them to 4.5%, then pause to allow those increases to take full effect, Solomon said. However, the Fed might not stop there if demand doesn’t falter 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 underscored the dramatic shift in monetary policy now 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 gloomy 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.

Read more: Experts are getting bullish on small caps. Here’s the case for the surprise pre-recession call, and what to buy.

Read the original article on Business Insider