Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein warned that the interest- rate environment has parallels to 1994, when a sudden and sharp increase in rates caught many investors off-guard.
“I worry now -- I look out of the corner of my eye to the ‘94 period,’’ Blankfein, 58, said today at a conference in Washington sponsored by the Investment Company Institute. He recalled how investors got used to low interest rates and were shocked by losses they suffered when rates rose.
The Federal Reserve raised its benchmark rate 3 percentage points from February 1994 to February 1995, from a then record- low 3 percent to 6 percent. Prices on Treasury securities and other fixed-income investments tumbled.
The rate increase was something ‘‘you’d think in hindsight should have been expected,’’ Blankfein said, although it ‘‘really was stunning.’’
Since December 2008, the Fed has held the Fed funds rate at between zero and 0.25 percent, a new record. It has been buying Treasury debt and mortgage-backed securities to reduce the cost of longer term borrowing as part of a policy known as quantatitive easing. Yesterday that Fed’s Open Market Committee said it is prepared to ‘‘increase or reduce’’ the pace of those purchases.
Blankfein’s concerns have proved prescient in the past. In June 2007, he warned about the possibility of a credit crisis, a year before the markets seized up.
‘‘We certainly are organizing ourselves like the market is undervaluing risk, and so we are in a high state of nervousness,’’ Blankfein said at conference hosted by the Wall Street Journal that month. ‘‘The biggest risk we face, and there are a lot of things that contribute to this risk, would be a very big crisis in the credit markets.’’