The Federal Reserve’s aggressive hikes on interest rates in the last 18 months are leading many to wonder if they could reach sky-high 1980s levels, when the federal funds rate reached 19 percent. That probably won’t happen, according to Goldman Sachs (GS) CEO David Solomon.
“I graduated from high school in 1980. So I remember those days. I don’t think we’re going back to that. I don’t think that’s likely,” Solomon, 61, said in an interview with Fox Business yesterday (Oct. 29). However, like many other bank CEOs, Solomon believes interest rates will likely stay at an elevated level, compared with the pandemic-era low, for the foreseeable future.
“I do think that we are going to live in what’s a more normalized environment and not an environment where money is free,” he added. The federal funds rate—a benchmark for mortgages, credit card and car loan rates—currently sits at 5.5 percent. The average rate in the U.S. between 1970 and 2023 is 5.42 percent, according to the Fed’s historic data.
Solomon predicts inflation will also stay high, given rising labor costs. “I think there is a risk that rates could go higher. I do think inflation is going to be sticky,” he said. “It’s particularly present at the moment around labor. So that has to have an effect that plays through.”
The Fed has stated a goal of bringing inflation down to 2 percent, but it’s still a long shot. In September, consumer prices rose 3.7 percent from a year ago. The pace of increase was the same as in August but higher than in July and June. A key driver behind stubborn inflation is high home prices. Surging mortgage rates, which should lead to fewer buyers in the market, have done little to bring down home prices because there are just as few homes available for sale.
Thanks to ultra-low interest rates during the pandemic, more than 60 percent of homeowners in the U.S. have a mortgage rate below 4 percent, according to Redfin data. “As a result, homeowners are reluctant to list their homes for sale because they would have to, in turn, buy new homes at a much higher mortgage rate,” Spencer Rascoff, the cofounder and former CEO of Zillow, told Observer in an interview last month. “Most people can’t afford to rebuy their existing homes at today’s rates.”
“I think one of the great tailwinds we have as an economy is most Americans who own homes put themselves in long-dated mortgages that have fundamentally low rates locked in for a long time,” Solomon said in his Fox interview.
The Federal Reserve is expected to announce its next decision on interest rates on Nov. 1. The central bank is expected to leave rates unchanged this time but will likely raise rates again this year at its December meeting.