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Goldman Sachs chief executive David Solomon has warned investors not to get too confident that the Federal Reserve can engineer a “soft landing” for the US economy in its battle to tame inflation.
Speaking at an industry conference organised by UBS on Tuesday, Solomon said “the world is set up for a soft landing”, but there was a “higher level uncertainty” due to remaining inflationary pressure in the economy and geopolitical risks.
“The market is way weighted to a very soft landing. And when you look at the pattern of facts the last three or four years, it’s hard for me to see it’s going to be that simple,” Solomon said.
Solomon’s comments reflect worries that financial markets have been overly optimistic in their predictions for what the Fed will do and their conviction that the central bank will not tip the US economy into a recession. This has so far been avoided and unemployment has remained low even as the Fed lifted interest rates from near zero to the current 22-year high of 5.25 per cent to 5.5 per cent.
“When I was on TV in Davos a month ago, the consensus was for seven interest rate cuts and I said, ‘Gee, I just don’t understand this,’” Solomon said.
Markets have since pared back their expectations and are now pricing in four cuts this year, rather than six or seven.
Solomon said the “upper half of the economy in the United States has been very strong” but that consumer spending in the lower tier of the economy has been slowing. The consumer confidence index, tracked by the Conference Board, unexpectedly fell in February to 106.7 from a revised 110.9 in January, missing expectations for a slight increase.
“I’ve talked to a bunch of CEOs that operate businesses that would have good insight into what I’ll call more paycheque-to-paycheque kind of spending behaviour,” Solomon said. “I think that in the last few months you’ve seen a pattern of those behaviours tightening up, which means that the lower part of the economy is a little bit softer.”
Solomon’s comments on the trajectory of the economy are more bearish than remarks he has made as recently as September, when he said that “the chances of a soft landing now are materially higher”.
Additional reporting by Kate Duguid
