Congress and the Federal Reserve will have a greater impact on the economy and markets than the pandemic, according to Goldman Sachs CEO David Solomon on Tuesday.

Since March 2020, both entities have implemented unprecedented levels of policy assistance totaling approximately $10 trillion.

With support from both beginning to wane in the coming days, the CEO of the Wall Street investment banking behemoth warned investors to be cautious and plan accordingly.

“I don’t believe we’re in a new paradigm where the world will be fundamentally different. But it’s going to take some time to move forward," said Solomon adding, “In the context of that, I think that monetary and fiscal policy on a go-forward basis will have a bigger impact on the trajectory of markets than the pandemic will from this point forward.”

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Inflation Factor

Inflation, which is rising at its fastest rate in more than 30 years, could be the main wildcard in the equation.

One reason the Fed is beginning to slow is that price increases have been stronger and more persistent than central bank officials had anticipated. "We clearly have real inflation in the economy," Solomon said, adding that investors may not fully comprehend what that entails.

“I do think that while we’ve had inflation below trend for quite a significant period of time, there’s a reasonable chance we’re going to have inflation above trend for a period of time,” he said. “It doesn’t mean it has to be like the 1970s – could be, doesn’t have to be – but when you think about periods where there’s inflation, inflation hurts asset prices and it slows down your ability to make money with almost any asset.”

Solomon pointed out that the Fed responded to inflation in 2004-06 by raising interest rates 17 times between June 2004 and June 2006. Almost all assets, including stocks, lost money during that time period, with oil and gold the only exceptions.

“Now I’m not saying that’s going to happen, but I think we’re living in a world where people are forgetting the history, and this might, you know, be a period that’s different,” Solomon said. “I think you’ve got to be very cautious and manage your risk appropriately for the distribution of the change that that might happen.”