By Saeed Azhar and Lananh Nguyen
NEW YORK (Reuters) -Goldman Sachs CEO David Solomon said the U.S. economy is likely to avoid a significant recession, but warned that inflation will likely be more persistent than market participants currently expect.
"The chance of having a relatively soft landing and navigating through this has gone up very meaningfully over the last 12 months," Solomon told Reuters in an interview on Tuesday. "The environment is definitely better."
The Federal Reserve has tamed inflation via interest rate increases, but it may need to take further action, he said.
"I have a personal point of view that inflation is going to be a little bit more sticky than the more optimistic views," Solomon said. "There's still work to do."
The current trajectory of the U.S. Treasuries' forward curve shows rates declining in the future, but Solomon cautioned that might not materialize.
"You have to recognize it's still very uncertain," he said.
Fed funds futures traders largely show the Fed will keep rates on hold until May or June next year, when traders expect the central bank will start cutting rates.
Still, optimism that the U.S. economy will avoid a recession is leading to a reopening of capital markets, Solomon said.
"You’re seeing now this month a bunch of significant IPOs in the market," said Solomon, who noted that Goldman was involved in most of the initial public offerings. "They're meaningful, they're going well," he said.
Arm, the chip designer owned by SoftBank (TYO:9984) Group Corp, is close to raising about $5.4 billion in New York in what might be the biggest IPO of 2023. The IPO will price on Wednesday.
Mergers and acquisitions likely will be slower to resume because uncertainty weighs on companies making strategic decisions.
"People are starting to open up to a better environment and think a little bit more forward strategically, but there's a lag time," Solomon said.
Solomon criticized U.S. proposals that would raise capital requirements for larger banks, echoing comments from his counterparts.
Michael Barr, the Federal Reserve's top regulatory official, told Congress in May that the central bank would unveil its plan to ratchet up capital rules for banks this summer and ensure supervisors more aggressively police lenders following regional bank failures earlier this year that required the government intervention.
"I do think these capital rules will have an impact on economic growth and that will affect large businesses and small businesses and their access to capital," Solomon said. "It'll push some activity out of the banking system if they're implemented."
JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon blasted the proposed rules, telling investors on Monday that they could prompt lenders to pull back and stymie economic growth.
If implemented, the regulations could increase Goldman's capital requirements by slightly more than 25%, Solomon told an investor conference later Tuesday.
The bank will take more writedowns on its commercial real estate portfolio in the third quarter, but amount will be lower than in the second quarter, when CRE weighed on its earnings.
Solomon also spoke about departures of senior bankers, citing historic instances of turmoil when Goldman combined or reshuffled businesses.
"Whenever you put businesses together, there's going to be disruption and there's going to be volatility," he said.
Goldman Sachs has seen several exits since it reorganized into three units last year and scaled back ambitions for its consumer business, which has lost $3 billion in the last three years.