Goldman Sachs Group Inc. (GS:US) Chief Executive Officer Lloyd C. Blankfein said debate about when the Federal Reserve will raise interest rates may help avoid “a jarring surprise” to markets.
It’s difficult to adjust rates slowly because markets anticipate changes in policy and react quickly, Blankfein, 58, said today at an event hosted by Politico in Washington. Public awareness and discussion about what will happen can smooth the process, he said.
“In order to do that in a way that’s not jarring, it makes sense to create incremental uncertainty that it’s about to switch,” he said of the Fed. “The behavior of the official sector in communicating is consistent with that ambition.”
Speculation that the Fed may slow or cease buying $85 billion a month in U.S. government debt and mortgage-backed notes has led the 10-year Treasury yield to climb to 2.18 percent from 1.63 percent on May 2 and sparked sell-offs of emerging-market bonds and currencies. Deutsche Bank AG (DBK) co-CEO Anshu Jain said last week that the market reaction is a “healthy” response to signals from the Fed that it may withdraw some of their record stimulus.
“Without any privileged knowledge, I think you can see exactly what they’re doing -- they’re jawboning the possibility of this intervention coming to an end,” Jain, 50, said at an investor conference in New York on June 4, referring to a practice of using speech instead of actions to produce market moves. “Term rates are now starting to absorb that information and reflect it in pricing -- no bad thing.”
Investors see a 47 percent chance the Fed will raise the rate to at least 0.5 percent from zero to 0.25 percent by December 2014, according to prices for federal funds futures contracts. Fed Chairman Ben S. Bernanke, 59, will have an opportunity to address those expectations during a press conference on June 19 after the Federal Open Market Committee concludes a two-day meeting and releases a policy statement.
Blankfein has said he sees risks of a repeat of 1994, when a sudden and sharp increase in rates caught many investors off-guard. He said today record amount of debt issuance and individuals holding a greater portion of their portfolios in bonds make that a risk.
The recent rise in rates reflect a view that quantitative easing could end “sooner rather than later,” Blankfein said. The current Treasury yields are still not at normal levels and short-term rates are unlikely to average 2.2 percent over the next 10 years, he said.
“Sentiment has adjusted, expectations have adjusted, and actually we’ve gotten some lift in rates, which is more toward normalization, and the world hasn’t come to an end,” Blankfein said. “So creating these doubts and creating these uncertainties is actually effective in the long-term goal of having as much stability as you can while you engineer a transition.”
Jamie Dimon, JPMorgan Chase & Co. (JPM:US)’s CEO, said at a panel discussion in Chengdu, China, on June 6 that he expects the prospect of higher interest rates to lead to some price swings.
“We should all hope for a normalization of interest rates -- that’s a good thing,” Dimon, 57, said at the Fortune Global Forum. “As we go back to normal, it’s going to be scary, and it’s going to be kind of volatile.”
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