The Federal Reserve should taper its massive bond-buying program at this point, but it shouldn't be as big as deal as investors are making it out to be, Lloyd Blankfein, chairman and chief executive of Goldman Sachs, told CNBC on Wednesday.
If the Fed scales back its asset purchases by $10 billion a month, the market will be "happy," but anything more it will be "sad," Blankfein said on " Squawk Box " from Chicago, where the investment bank held a CFO conference.
The decrease in the federal deficit because of the sequester spending cuts and increased taxes has been more significant in the "normalization" of the stock market than the Fed taper would be, he said.
Another factor that's removing "abnormal" conditions for the market has been the increase in bond yields, he continued. "The fact that interest rates were 1.5 percent was an artificial support for the market. And the fact that it's moved 150 or 140 basis points higher represents some withdrawal already."
Meanwhile, all current candidates for Fed chair are very strong, and forward economic guidance from the central bank would be more credible to the markets with continuity, he said.
Blankfein also said he did not know in advance that Goldman would be added to the Dow Industrial Average. He added that inclusion in the blue-chip index was a nice validator for the company.
The economic recovery trajectory "is not as steep as it should be," Blankfein said, but added that he's generally bullish on the economy.
The Fed concludes its two-day meeting Wednesday, and the 2 p.m. ET policy statement is widely expected to contain the declaration that the central bank has begun to taper its $85-billion-per-month bond-buying program.
The Fed also issues its latest economic projections, and Chairman Ben Bernanke will hold a 2:30 p.m. ET news conference. The markets have been largely positive leading up to the Fed decision, with the S&P 500 up in 10 of the past 11 sessions.
When Blankfein appeared on CNBC at in late June, he said the pullback in stocks at that time on the Fed taper talk was an overreaction.
(Read more: Blankfein: Market overreacted to the Fed )
Since the June 24 bottom, the S&P 500 has risen about 7 percent and the Dow Jones Industrial Average (Dow Jones Global Indexes: .DJI) has gained nearly 5 percent.
Last week, Peter Oppenheimer, chief global equity strategist at Goldman, said equities have now entered a "growth" phase-the longer but more moderate stage of a bull market, when equities are driven more by earnings rather than valuations.
Back on March 21, 2012, Goldman said the prospects for making money in equities relative to bonds were as good as they had been for a generation. Since then, the Dow has gained about 17 percent and the S&P increased more than 20 percent.
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