"The market is suggesting a protracted deflationary period," he said. "I don't think it, but that's the sensible way of interpreting what's going on."
Falling oil prices have been a drag on stocks.
Brent crude dipped below $50 a barrel early Wednesday for the first time since May 2009. U.S. oil prices fell below $47 after a 4 percent decline in New York trading Tuesday.
The S&P 500 fell for a fifth-straight session Tuesday. That marked the third-consecutive down day in 2015—the worst ever start to a year, a 2.7 percent decline for 2015.
Blankfein said he won't extrapolate too much from the tough start for stocks.
The macro picture still looks favorable, he added—citing above-trend economic growth for the U.S. and the continued expectation for very low interest rates. "That's a very good environment for asset prices and for stocks."
He said he if were the Fed he'd "take a lot of risk on the inflation side ... and take that risk to avoid a low but very adverse consequence of [economic] backsliding."
"The only game in town has been monetary," he continued. "But I would keep firing because sustaining it is a lot more sure than losing it and trying to recapture the momentum."