Chief Executive Officer of Goldman Sachs Group Inc. David Solomon said that the downward trend in consumer spending in the United States creates reason to doubt that the economic system of this country will be able to avoid the implementation of a negative recession scenario.
At the UBS Group AG conference last Tuesday, February 27, the head of one of the largest US banks noted that the world is set for a soft landing. Separately, he underlined that the market is registering an understanding of the high level of probability of the implementation of the corresponding scenario for the further existence of the economic system. At the same time, David Solomon stated that, in his opinion, there is uncertainty about the prospects for the materialization of the mentioned vision of the future.
According to the head of one of the largest lenders included in the structure of the American banking sector, business representatives informed him that against the background of high price levels, which do not show signs of approaching dynamic in the direction of decline, a trend of behavior concerning expenses on a paycheck-to-paycheck principle is beginning to form in the consumer environment.
David Solomon believes that the economic situation is developing in the right direction, but the degree of uncertainty is more significant compared to the corresponding market estimates.
In the United States, interest rate increases were recorded in 2022 and 2023. The realization of these measures had the highest level of intensity in the last 40 years. The central bank took appropriate decisions as part of efforts aimed at curbing the process of increasing inflation. Currently, there are signs of a gradual easing of price pressure in the United States. The country’s economic system continues to be stable. Federal Reserve officials are demonstrating their readiness to implement a new monetary policy course, which provides for a reduction in interest rates. It is expected that in this case there will be a slower and less regular pace of decision-making compared to the strategy of aggressive growth of the mentioned indicator.
Investors have bet that a slowdown in inflation will contribute to a faster reduction in interest rates. According to David Solomon, this position is gradually changing against the background of the declining intensity of economic processes. The head of Goldman Sachs says that investors are reviewing many components in their approach to forecasting the dynamic of interest rates. Currently, expectations regarding the extent of monetary policy easing are becoming more restrained. Investors are reducing the number of anticipated interest rate cut decisions in their forecasts for 2024.
David Solomon noted that activity in the investment banking sphere has demonstrated a low level of intensity. At the same time, he noted that signs of improvement in the situation are currently being recorded. David Solomon expects positive changes in the operating environment for the core business of the financial institution he heads. He clarified that improvements regarding the current state of affairs will not be recorded every minute or every quarter. It is worth noting that this is a private opinion and a preliminary assessment of the prospects.
David Solomon also stated that there are significant opportunities in the area of private lending. He noted that Goldman Sachs is a major player with $130 billion in capital. In this context, David Solomon stated that over the past 20 years, the bank has been raising funds for institutional events. On the background of the mentioned fact, this lender should have $300 billion of private credit but the actual figures are different.
The head of Goldman Sachs also said that the financial institution intends to raise the ninth large-scale private equity fund this year.
JPMorgan Chase CEO Jamie Dimon said at the current week that markets probably do not consider the possibility that high interest rates will turn out to be a longer-term reality than expected. He also stated his disagreement with the opinion that the economic system of the United States is likely to avoid a recession. In his opinion, it is not necessary to consider the implementation of a positive scenario in the context of a high probability. At the same time, Jamie Dimon did not characterize the soft landing as an unrealistic vision of the future. In his opinion, the probability of this scenario is 50%.
Jamie Dimon says that high interest rates and recession can form an aggregate effect, which will become a factor of negative impact on the situation in such an area as commercial real estate. Also, in his opinion, in this case, regional players in the banking sector of the United States will face problems. At the same time, he noted that under the appropriate scenario, the macroeconomic consequences would be limited.
Mr. Dimon also said that, in his opinion, in the foreseeable future there will be no repeat of the large-scale downturns that the United States economy had to face. In this context, the 2008 financial crisis was mentioned, which triggered the plunge of Wall Street. At that time, banks suffered due to the collapse of the subprime mortgage industry.
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