The Fed’s aggressive interest rate increases over the past 18 months have many wondering whether interest rates could ever reach the sky-highs of the 1980s, when the federal funds rate was 19 percent. That probably won’t happen, according to Goldman Sachs (GS) CEO David Solomon.
“I graduated high school in 1980. So I remember those days. I don’t think we’ll go back to that. “I don’t think that’s likely,” Solomon, 61, said in an interview with Fox Business yesterday (October 29). However, like many other bank CEOs, Solomon believes interest rates are likely to remain at a high level, compared to the pandemic-era low, for the foreseeable future.
He added: “I think we will live in a more normal environment and not one where money is free.” The federal funds rate — a benchmark for mortgages, credit card and auto loan rates — is currently 5.5 percent. The average interest rate in the United States between 1970 and 2023 is 5.42%, according to historical data from the Federal Reserve.
Read also: When will the Fed stop raising interest rates? Damon, Ackman, and Dalio may have reached a consensus
Solomon expects inflation to remain high as well, given rising labor costs. “I think there is a risk that interest rates will rise. I think inflation will be flat.” “It is especially present at the time of labor. So this has to have an impact that is implemented.”
The Fed has announced its goal of lowering inflation to 2 percent, but this remains a long way off. In September, consumer prices rose 3.7 percent compared to last year. The pace of increase was the same as in August but higher than in July and June. The main driver behind stubborn inflation is rising housing prices. Higher mortgage rates, which would put fewer buyers in the market, have done little to lower home prices because there are fewer homes available for sale.
Thanks to ultra-low interest rates during the pandemic, more than 60% of U.S. homeowners have a mortgage rate below 4%, according to Redfin data. “As a result, homeowners are reluctant to list their homes for sale because they, in turn, will have to buy new homes at a much higher mortgage rate,” Spencer Rascoff, co-founder and former CEO of Zillow, said in an interview with the Observer. Last month. “Most people can’t afford to buy back their current homes at today’s prices.”
“I think one of the strong tailwinds that we have as an economy is that most Americans who own homes are putting themselves in long-term mortgages with essentially low interest rates for a long time,” Solomon said in his Fox interview.
The Fed is expected to announce its next interest rate decision on November 1. The central bank is expected to leave interest rates unchanged this time but is likely to raise interest rates again this year at its December meeting.