Blankfein Warns Of "Jarring" Jolt From Fed Rate Hike

Lloyd Blankfein and Michael Bloomberg sat down for an interview with Bloomberg TV on Wednesday, and discussed a wide range of topics from Fed "liftoff" to China to US politics. 

There was quite a bit of aimless pontification, a bit of levity, plenty of hypocrisy, and some rather amusing commentary on democracy in America and the role of the Presidency. Most notable are Blankfein’s thoughts on the effects of a Fed rate hike and Bloomberg’s take on income inequality in America and Congressional paralysis. 

Here’s Blankfein on "liftoff":

Well, I think it will be jarring when we see an interest rate hike because we have not had one for some time. And then I think people will get out the smelling salts, take a sniff, and recover because when we have that first hike, the Fed has already suggested that it will be very conservative, at the trajectory of future hikes. 


And so if we end up with interest rates at 0.5 percent, or even if we went, over time, in the near future to 1 percent against the growth rate, it will only be because the growth rate is at trend growth or maybe even higher.  That will still be substantially easier financial conditions than we usually have. 


And the Fed  would rather take a risk on having rates too soft for longer than run the risk of giving up all that they have accomplished and in getting  the economy to where it is now.  And so they will keep things easier for a long time.

So in other words, a legion of traders who have never, in their young careers, seen a rate hike cycle will immediately panic and have to be revived with "smelling salts", after which everyone will realize that in the grand scheme of things, rates will never really "normalize" (incidentally, neither will GDP growth) and that the Fed became an instrument of Wall Street decades ago, so if the FOMC does prove unable to keep the party going in financial assets, it won’t be for lack of trying. 

Next is Bloomberg on inequality and the Fed’s role in exacerbating the wealth divide:

Well, I think -- there's no question that they have -- the Fed's low -- in my mind, anyways -- no question that low interest rates have exacerbated the wealth gap between the poor and the rich because the rich have assets.  And that is what is being hiked here because of low interest rates, whether they own stocks or real estate or whatever the case may be. 


And long-term, that is a very big problem for this country.  And you do not solve the problem as the populists would argue by taking things away from the rich.  You solve the problem by giving opportunity to everybody and by creating jobs. 

Aside from the humor inherent in the fact that this is a billionaire talking about class segregation, the real punchline here is that Bloomberg is making these comments just a week after his own media empire ran a story on Lloyd Blankfein becoming a billionaire on the back of the Fed-assisted rise in his company’s stock price. 

And here’s Bloomberg on why what matters in the political process isn’t necessarily what citizens want, but rather how effective a President is at imposing his or her own will on the collective. As for Congress, well, Bloomberg "doesn’t want to use the word manage," but really, lawmakers are a lot like children wanting to play Angry Birds and as such, the President must be the parent and simply "bring them along."

But let me just give you a thought, Stephanie, we keep thinking the wrong thing when we pick the elected leaders, particularly the Presidents of the United States, governors of the states and mayors of the cities. These are not policy jobs.  These are executive jobs.  You have to pick somebody that knows how to run the railroad. 


That's part of the job.  You can't blame -- the executive's job is to bring along the legislature. I don't want to use the word manage because they have their own third of the government, if you will, of power. But it is the executive's job to explain to the legislators why his or her policies are the right one and bring them along. 


You do not go and do a poll and ask the public what they want and then try to take them there. That is leadership from the back.  You are elected to go and to say this is what I'm going to do and convince people to come along with you and have the horses to get us all there.


But you know, that is the executive's job, to get Congress to come together. You trade, you bribe, you threaten, you cajole, you do all these sorts of things, the same way you run your kids. 


You say to your kid, clean your room or you do not get your allowance.  You say to your kid, you do your homework or you cannot play Angry Birds.  You say to your kid, you're doing a great job and let's just do more of it.  I'll help you.  I'll work together.  People interact on a lot of different ways.  And it is the executive's job to do that with Congress as well. 

And if all of the above isn’t scary enough for you, we’ll close with the following exchange:

Bloomberg: Would you like to get into government? 


Blankfein: I think it would be an attractive thing to do.