Lloyd Blankfein on the economy: Odds of a ‘bad outcome’ have gone up

Goldman Sachs CEO Lloyd Blankfein: 'I haven't felt This particular Great since 2006'

Lloyd Blankfein can be worried which a spending spree by the Trump administration could overheat the American economy.

“The odds of a bad outcome have gone up,” the Goldman Sachs CEO told CNN’s Christine Romans in an interview airing Wednesday.

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Blankfein noted which the economy was already humming along before the federal government juiced the item with $1.5 trillion in tax cuts as well as $300 billion of additional spending, pushing up the budget deficit. as well as at This particular point, President Trump has proposed a $0 billion infrastructure package.

which kind of spending can be normally reserved for recessions — or at least fragile recoveries — not booms.

While the item’s not his “base case,” Blankfein said the risk can be which all which stimulus could be “too much of a Great thing” for the economy as well as financial markets.

“Don’t forget, all of these deficits have to be paid for,” he said on the sidelines of Goldman’s 10,000 smaller Businesses Summit.

Related: Trillion-dollar deficits will hit sooner than expected

Wall Street loudly celebrated after Trump as well as the Republican-controlled Congress delivered major tax cuts in December. At one point last month, the Dow was up 45% via the level the item was at when Trump won the election. The index jumped 1,000 points inside the space of just seven trading days in January.

Optimism can be also on the rise among smaller companies. A recent survey by the National Federation of Independent Businesses found which owners of smaller firms say This particular can be the best time in decades to expand.

For Blankfein, who became Goldman CEO nearly 12 years ago, the current upbeat mood can be laced with memories of the heady days which preceded the global financial crisis.

“What could possibly go wrong? I haven’t felt This particular Great since 2006,” he joked.

Related: Are Trump’s tax cuts backfiring on Wall Street?

Investors have begun to worry about a potential hangover. Fears which inflation will force the Federal Reserve to end the party by aggressively raising interest rates sent the Dow plunging 1,300 points, or 5.2%, last week. the item was the index’s biggest weekly drop in two years.

“If the economy starts to overheat, as well as the Fed feels which the item’s behind” on inflation, the item will need to act, Blankfein said.

Concerns about runaway inflation forced the Fed to scramble in 1994 by dramatically raising rates more than Wall Street anticipated.

“I remember 1994,” Blankfein said. “which’s possible, too. which would likely be quite jarring to the economy.”

Heavy selling has already lifted the 10-year Treasury yield via 2.4% at the start of 2018 to around 2.85% today. which’s critical because Treasuries help set the cost for virtually every various other asset. Higher returns for U.S. government debt, which can be seen as an ultra-safe investment, could hurt demand for riskier assets like stocks.

While Treasury yields remain historically low, they are climbing. which’s down to a variety of reasons, including the stronger economy, more inflation as well as concerns about rising deficits which could reach $1 trillion in fiscal 2019.

Related: The bond market scare might not be over

Washington’s spending binge will force the Treasury to borrow more by issuing more bonds. Those bonds will need to be sold at the same time which the Fed can be winding down its past stimulus efforts, which were known as quantitative easing (QE), by offloading vast amounts of Treasury notes.

“They have a competitor: the central bank,” Blankfein said. “They’re going to sell into the same kind of market to the same investors.”

To be clear, Blankfein isn’t predicting disaster. He noted which interest rates remain relatively low as well as said his “base case” can be which the economy will stay broadly on track.

Still, he urged individual investors to tread carefully.

“I wouldn’t throw all in,” Blankfein said. “With the Fed raising rates, with the withdrawal of QE, with the budget deficit widening out, I wouldn’t say This particular can be the time I would likely max out on my risk.”

CNNMoney (brand-new York) First published February 14, 2018: 6:33 AM ET


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