Blankfein Says Fed Can Stop Rate Hikes After Bank Crisis

(Bloomberg) — Former Goldman Sachs chief executive Lloyd Blankfein said the Federal Reserve can take a pause hiking interest rates this week as the unfolding bank crisis will effectively tighten lending standards in the economy.

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Increased scrutiny following the collapse of Silicon Valley Bank and Signature Bank will lead to banks extending less credit on deposits, Blankfein said in an interview on CNN’s “Fareed Zakaria GPS” broadcast Sunday. That’s while the market is projecting more than a 70% chance the Fed raises rates by 25 basis points when it meets this week, he said.

“I personally think it will be OK to stop here,” said Blankfein, now senior chairman at Goldman Sachs. “This situation will act in a way that is similar to a rate rise in some ways.”

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Such tightening of lending will translate to less growth and meet the Fed’s goals of slowing the economy to keep a lid on price inflation, according to Blankfein. Credit markets have been reeling since the crisis began, with costs jumping and corporate borrowers standing down from issuing new debt.

Before the collapse of SVB and the resulting fallout, Fed policy makers were poised to raise rates by as much as 50 basis points as price pressures in the US economy proved sticky. Given the current market volatility, some Fed watchers are expecting a quarter point hike, while others predict a pause as the central bank examines whether the brakes on the economy have been slammed too hard.

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Blankfein also warned that without intervention to protect deposits at smaller and regional banks, consumers may come to rely only on the biggest 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 various sectors,” he said. “That’s probably a good thing. I wouldn’t necessarily want to experiment and withdraw that.”

He also suggested that the sector’s current crisis is different from the global financial crisis triggered in 2008, when he was leading Goldman Sachs.

“In 2008, there were asset problems,” said Blankfein. “In the current market, it’s really people pulling out their deposits but the assets are, probably in the long run, money good.”

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