Economists, investors, and business leaders have been warning about a likely U.S. recession all year, and they are just getting louder.
In May of this year, Goldman Sachs CEO David Solomon told Bloomberg there was a chance of a recession, but that he wasnt too concernedat that time. He was instead focused on getting inflation under control, he said.
Fast forward almost six months, and he seems to have made up his mind. Earlier this month, he warned of an increasing likelihood that the U.S. would enter into a recession, saying we could expect more volatility on the horizon, and at Saudi Arabias Future Investment Initiative conference on Tuesday, the so-called Davos in the Desert, he took it a step further.
The U.S. will likely have a recession at this point and its because inflation is embedded, Solomon said. JP Morgans Jamie Dimon, who was also at the event, responded to Solomon by simply saying: I agree.
Generally, when you find yourself in an economic scenario like this, where inflation is embedded, its very hard to get out of it without a real economic slowdown, Solomon said.
Solomon was referring, of course, to inflation consistently hitting levels unseen for 40 years throughout 2021, an earth-shaking economic event that team transitory said was unlikely. It peaked at 9.1% year-over-year in June and only slowed slightly to 8.5% in July, 8.3% in August, and 8.2% in September. All of this has prompted the Federal Reserve to hike interest rates aggressively to lower inflation to its 2% target, but Solomon said its embedded into the economy and wont come down on its own.
The Fed has raised interest rates five times this year (with the last three all being an increase of 75 basis points), reaching a benchmark rate of 3% to 3.25%. Thats the highest its been since the 2008 financial crisis, as Fed chair Jerome Powell sticks to his vow to bring some pain to households and businesses in an attempt to tame prices. As much pain as a recession? Solomons saying thats how it looks.
The Fed has been criticized heavily and blamed for potentially pushing the U.S. into a recession, with economists like Jeremy Siegel saying its slamming the brakes way too hard, as it raises interest rates, and Mohamed El-Erian saying the Fed waited too long to act on high inflation.
Some economists expect the Fed to announce another rate hike by 75 basis points in November.
There is no question that economic conditions, in my opinion, are going to tighten meaningfully from here, Solomon said.
He added: I think in the United States, particularly in the last week or two, theres been a clear message from the Fed that theyre going to get to the current path target of 4.5 or 4.75, and then pause because theres a lag effect to all of this.But if they dont see real changes in behavior, my guess is, theyll go further.
For Solomon, those changes mean a decrease in demand and a loosening of the labor market. If not, the U.S. will continue to see this shift away from low inflation and interest rates that were once close to zerowhat Bank of America has called an aberration.
Were living in an environment, where at least from a monetary perspective, the decisions weve made over the last 40 years, were in the process of unwinding a multi-decade period, and theres consequences to that, he said.
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