Hike rates

Recession likely in the United States, the Fed could raise its rates above 4.5%

  • Goldman Sachs CEO David Solomon said the US economy is likely to slip into a recession.
  • He warned on Tuesday that the Federal Reserve could raise rates above 4.5% if the inflationary threat persists.
  • The first big change in monetary policy in four decades was expected to be disruptive, Solomon said.

The U.S. economy will likely suffer a prolonged slowdown and the Federal Reserve could raise interest rates above 4.5%, Goldman Sachs CEO David Solomon has warned.

“There is no doubt that economic conditions will tighten significantly from here,” the bank’s chief said during the Future Investment Initiative Tuesday in Saudi Arabia. “The United States is very likely to experience a recession.”

Inflation hit a 40-year high of 9.1% in June and remained above 8% in September. The Fed tried to rein in further hikes by taking rates from near zero in March to a range of 3% to 3.25% today.

The U.S. central bank signaled it would raise them to 4.5% and then pause to allow those increases to take full effect, Solomon said. However, the Fed may not stop there if demand does not weaken and the labor market remains extremely tight, he added.

“If they don’t see real changes in behavior, I guess they will go further,” he said. “Generally, when you get into an economic scenario like this, where inflation is priced in, it’s very difficult to get out of it without a real economic downturn.”

Solomon pointed to the drastic change in monetary policy underway, after about 40 years of the Fed keeping rates low and buying government bonds to stimulate the economy, without having to worry about inflation.

“We are now unrolling a period of decades, and there are consequences to that,” he said. “There are no easy answers. There are no quick fixes.”

The Goldman chief released a gloomy economic outlook earlier this month, inciting Amazon founder Jeff Bezos to express his agreement.

“In the earnings distribution, there’s a good chance we’ll have a recession in the United States,” Solomon said.

“Yeah, the odds in this economy are telling you to batten down the hatches,” Bezos replied.

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