“The odds of a bad outcome have gone up,” Blankfein told CNN on Wednesday.
Trump outlined a budget this week that could add $7tn to the nation’s debt over the next decade. Blankfein warned that over-stimulating an already healthy economy could prove “too much of a good thing”.
“Don’t forget, all of these deficits have to be paid for,” he said.
Blankfein said the current upbeat mood reminded him of the optimism that preceded the global financial crisis of 2007-8.
“What could possibly go wrong? I haven’t felt this good since 2006,” he joked. “If the economy starts to overheat, and the Fed feels that it’s behind on inflation, it will need to act,” he added.
Blankfein stopped short of issuing an-all out warning.
But “with the Fed raising rates, with the withdrawal of QE, with the budget deficit widening out, I wouldn’t say this is the time I would max out on my risk.”
Over the past 10 days, Wall Street has been reacting spasmodically to Trump’s economic stimulus measures and clear signals from the Fed that it will raise interest rates to in an effort to counter signs that inflation could soon outstrip the Fed’s 2% target.
The Dow Jones industrial average is up about 5,000 points since Trump took office – a figure that takes into account more than 2,000 point drop since its late January high.
At the same time, fears of inflation are intensifying. On Wednesday, the labor department announced that consumer prices rose 0.5% in January, the most in four months. The annual rate of headline inflation of 2.1% for January was stronger than the consensus forecast of 1.9%.
However, the core gauge of consumer prices, which excludes energy and food, stayed steady at 1.8%. Market analysts had expected core inflation to slip to 1.7%.
In an investor newsletter, Capital Economics warned on Wednesday that any respite for the US stock market was “likely to be short-lived” as inflation continued to increase.
“In particular, we expect core inflation to rise to around 2.2% in the spring, and to trend higher from there.”
It added that despite revising their expectations for interest rate rises, investors “are still underestimating how quickly the Fed will raise interest rates in response to core price pressures”.
Sharp jumps in interest rates based on increasing inflation is precisely what investors fear, and there are signs that selling on the equity markets is lifting the yield on 10-year treasury bonds from 2.4% at the start of 2018 to around 2.85% today.
This article was written by Edward Helmore in New York, for theguardian.com on Wednesday 14th February 2018 18.15 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010