Lloyd Blankfein, former Goldman Sachs chief executive has warned corporate America and US consumers to brace for a downturn as the Federal Reserve tightens policy to combat excessive inflation.
Blankfein, who stepped down as Goldman top in October 2018 but remains the Wall Street bank’s senior chair, told CBS News on Sunday that there was a “very, very high risk” that the US economy would enter a recession.
He said, “If I were running a big company, I would be very prepared for it. If I was a consumer, I’d be prepared for it. But it’s not baked in the cake.”
He believes that a recession is “not baked in the cake” and that there is a “narrow road” to prevent it. The Federal Reserve has “quite powerful weapons” to combat inflation and has been “responding well,” the former Goldman CEO added.
“The Fed has very powerful tools. It’s hard to finely tune them and it’s hard to see the effects of them quickly enough to alter it. But I think they’re responding well,” he said.
With high fuel prices and a shortage of baby formula as tangible indicators of Americans’ unease, US consumer sentiment fell to its lowest level since 2011. Consumer prices in the United States increased 8.3 percent year on year in April, slowing slightly from March but remaining among the fastest rates in decades.
Mr. Blankfein’s remarks were made on the same day that the investment firm’s economists cut their US growth forecasts for this year and next to reflect the recent market turmoil.
Goldman’s economic team, led by chief economist Jan Hatzius, now forecasts US GDP growth of 2.4 percent this year, down from 2.6 percent previously. It lowered its 2023 forecast to 1.6% from 2.2 percent.
According to the report, this is a “necessary growth slowdown” to help temper wage growth and bring inflation back down to the Federal Reserve’s 2% target. While the slowdown will increase unemployment, Goldman believes that a sharp increase in joblessness can be avoided.
While some of the inflation will subside as supply chains unclog and Covid-19 lockdowns in China ease, “some of these things are a little bit stickier, like energy prices,” Mr. Blankfein said.
Americans benefited for a long time from globalization, which made goods and services cheaper based on cheaper labor abroad, he said.
“How comfortable are we now to rely on those supply chains that are not within the borders of the United States and we can’t control?” Mr. Blankfein said. “Do we feel good about getting all our semiconductors from Taiwan, which is again, an object of China?”