(Bloomberg) — Former Goldman Sachs chief executive Lloyd Blankfein said the Federal Reserve may take a break from raising interest rates this week as the unfolding banking crisis will effectively tighten credit standards in the economy.
Most read from Bloomberg
Increased oversight following the collapse of Silicon Valley Bank and Signature Bank will result in banks extending less credit on deposits, Blankfein said in an interview on CNN’s “Fareed Zakaria GPS” broadcast on Sunday. That’s while the market expects a greater than 70% chance of the Fed raising rates by 25 basis points this week, he said.
“Personally, I think it’s okay to stop here,” said Blankfein, now senior chairman at Goldman Sachs. “This situation will in some ways work in a way similar to a rate increase.”
El-Erian pushes for a 25 basis point increase and says the Fed shouldn’t blink
Such credit tightening will translate into less growth, according to Blankfein, and meet the Fed’s goals of slowing the economy to contain price inflation. Credit markets have been reeling since the onset of the crisis, with costs rising and corporate borrowers stopping to issue new debt.
Before the collapse of the SVB and the ensuing fallout, Fed policymakers were on the verge of raising interest rates by as much as 50 basis points as price pressures in the US economy proved intractable. Given the current market volatility, some Fed watchers expect a quarter-point increase, while others predict a pause as the central bank examines whether the brakes on the economy have been slashed too hard.
Fed considers pause as market turmoil Roils Markets: Eco Week
Blankfein also warned that without intervention to protect deposits at smaller and regional banks, consumers may rely only on the largest banks, which have high capital and liquidity standards. That could lead to consolidation in the financial sector, which would be a negative development for the country’s large and growing economy, he said.
“Our credit system is in the communities and in the industries and in the different sectors,” he said. “That is probably a good thing. I wouldn’t necessarily want to experiment and withdraw that.”
He also suggested that the industry’s current crisis is different from the global financial crisis that emerged in 2008 when he ran Goldman Sachs.
“In 2008, there were asset problems,” Blankfein said. “In today’s market, it’s really people withdrawing their deposits, but the assets, probably in the long run, are good for money.”
Most read from Bloomberg Businessweek
©2023 Bloomberg LP
