Goldman Sachs CEO Sees Fed Hiking Rates ‘Meaningfully From Here,’ Says Recession ‘Likely’

Goldman Sachs CEO David Solomon in Washington, on Oct. 10, 2017. Paul Morigi/Getty Images for Fortune

Goldman Sachs CEO David Solomon said on Tuesday he thinks that, amid persistently high inflation, the Federal Reserve will hike rates beyond the range of 4.5–4.75 percent if the central bank doesn’t see any “real changes in behavior.”

Solomon made the remarks at Saudi Arabia’s flagship investment conference in Riyadh, on Oct. 25, alongside other top Wall Street bankers who discussed issues of concern to investors, including soaring inflation and geopolitical risks.

Inflation, which has been running near multi-decade highs in the United States and elsewhere, has prompted central banks to embark on aggressive tightening cycles to cool demand and take the sting out of price pressures.

The Fed has hiked interest rates at the fastest pace since the 1980s, with market expectations indicating that more monetary tightening is coming.

The current federal funds rate is in the range of 3.00–3.25 percent, and markets are pricing in another 75 basis-point rate hike when Fed policymakers of the Federal Open Market Committee meet on Nov. 2.

‘Tighten Meaningfully From Here’

Solomon said at the investor conference that he expects economic conditions to “tighten meaningfully from here” and that the Federal Reserve needs to see changes in the economy.

“If they don’t see real changes–labor is still very, very tight–they’re obviously just playing with the demand side by tightening. But if they don’t see real changes in behavior, my guess is they'll go further,” Solomon said.

Fed officials have said they want to see the labor market brought into more balance, hoping to cool the economy just enough to bring the number of job openings closer to the number of unemployed people without damaging the economy. At last count, there were around 10 million job vacancies in the United States compared to a little more than 6 million unemployed persons.

But how high the Fed has to hike rates to achieve its goals is a moving target, informed by ongoing data on the labor market, which has remained tight.

The Federal Reserve Bank of Atlanta’s market expectations gauge for the terminal interest rate—the level at which the central bank will hit pause and possibly begin easing—now stand at 4.98 percent.

‘Stickier, More Pervasive Inflation’

Analysts at BNP Paribas, who expect that the U.S. economy will go into a recession in the second quarter of 2023, think the Fed will push interest rates beyond market expectations, to a peak of 5.25 percent.

“We expect a more aggressive Fed response to stickier, more pervasive inflation to push the economy into recession,” BNP said.

While speaking at the investor conference in Saudi Arabia, Solomon said that he, too, thinks it’s “likely” that the U.S. economy will tip into a recession and that Europe might already be in the grips of one.

The U.S. economy contracted for two consecutive quarters this year, meeting the informal definition for a recession, though it has yet to be formally labeled as such by the official arbiters of downturns at the National Bureau of Economic Research.