Blankfein: Market Overreacted to the Fed

Lloyd C Blankfein, CEO of The Goldman Sachs Group, Inc.
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Lloyd C Blankfein, CEO of The Goldman Sachs Group, Inc.

Goldman Sachs Chief Executive Lloyd Blankfein said Thursday the markets' big selloff was an overreaction to news the Federal Reserve may slow its bond purchases later this year.

"The market understood, but the market overreacted," Blankfein told CNBC's Maria Bartiromo on "Closing Bell," adding Fed Chief Ben Bernanke made clear in his comments last week that the program could start winding down toward the end of 2013, but only if labor-market conditions greatly improve. "The market, of course, took this as 'Oh, my God. It's the first moment and it was going to be an avalanche.' And of course, that doesn't necessarily have to be the case."

Critics have argued the Fed's policies will further devalue the U.S. dollar and ultimately create inflation, which is why many investors have bought gold as a hedge against this possibility. Gold had skyrocketed as the Fed rolled out quantitative easing, but on the belief it will soon curb its bond buying, investors have relentlessly sold the precious metal for nine straight sessions.

"Gold has its moment when people lose all confidence in all currencies and other places to store value and also when interest rates are very low so that gold is relatively cheap to hold compared to where they can have their alternatives," Blankfein said. "As people get more confidence in their economies and their currencies and as rates start to rally, it's not a very favorable market for gold."

Blankfein pointed to an array of bright spots in the economy such as a shrinking deficit, greater energy independency and ample liquidity. The problem, he said, is poor sentiment among Americans. The financial crisis has left many businesses and institutions adverse to risk taking for fear of failure, which Blankfein said is detrimental to progress and confidence.

"Sentiment has a real effect. This is not natural science. It's a social science, so sentiment and people's feeling really matters in this thing," Blankfein said. "Confidence really matters."

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By CNBC's Drew Sandholm. Follow him on Twitter @DrewSandholm.

— Reuters contributed to this report