Over the weekend, during an interview with Fareed Zakaria, Lloyd Blankfein said that in his view, it’d be “OK” if the Fed were to “stop here.”

He was referring, of course, to the prospect of a pause (or an end, even) to the most aggressive rate-hiking campaign in a generation. “This situation will act in a way that is similar to a rate rise,” Blankfein told Zakaria. “This situation” is a banking crisis, and it was ongoing Monday, or at least according to shares of First Republic.

Last week, Blankfein’s former employees abandoned their call for a March Fed hike following the second-largest US bank failure in American history, and a few days later, Goldman slashed their US GDP forecast to account for expected drag from tighter lending standards.

On Monday, David Mericle expanded on the bank’s call for a Fed pause, and the language he employed was worth highlighting.

“Our rationale is simple: It does not make sense to tighten monetary policy amidst ongoing stress in the banking system that could present substantial downside risk to the economy,” he wrote, adding that banking “is not just another sector.” Rather, financial intermediation “is vital to every sector.”

If you’re wondering whether Goldman was explicit in suggesting that banking turmoil should take precedence over the inflation fight, the answer is “Yes.” And unequivocally so.

“Addressing stress in the banking system is the most immediate concern and must take priority over other less urgent goals for the moment,” Mericle went on. Inflation, running nearly three times target, is now a “less urgent goal.” Goldman said they expect “policymakers and staff economists” to agree with that assessment.

For what it’s worth, I agree with it too, if for no other reason than the fact that these sorts of spirals are virtually impossible to short circuit once they get moving in the wrong direction. The banking system, and the currency more generally, are just a high stakes confidence game. Crises of confidence are thus non-starters.

Remember: Credit is a byproduct of faith in the future. Today, the term “credit” often carries a negative connotation because it’s interchangeable with the term “debt.” But if people can’t get credit, they can’t finance businesses. If business financing is severely constrained, the economy can’t grow. If the economy doesn’t grow, people will revert to a pre-modern mindset, where that means extrapolating a low- or no-growth future. That, in turn, will make those with capital still more reluctant to lend. Economic stagnation thus becomes a self-fulfilling prophecy.

More succinctly: If there’s no credit, there’s no future. Currently, conditions are such that credit is likely to be constrained, and the Fed has to avoid making that situation worse.

In addition, and as discussed here+ on Sunday evening, the combination of the swap line announcement and heavy discount window usage last week, is nearly impossible to reconcile with ongoing rate hikes and QT. That cognitive dissonance might be too much for markets to countenance.

“The key lingering concern is that recent events have made large depositors such as corporate treasurers and wealthy individuals who are not fully protected by deposit insurance more concerned about risks at small and midsize banks, which could lead to continued outflows to larger banks and to alternatives to bank deposits like Treasury securities,” Goldman went on to say, noting that because “only regulators can see real-time changes in deposit levels at individual banks… the extent of deposit outflows from small and midsize banks to large banks is less clear, and how far outflows will ultimately go is even less clear.”

The figures above are useful. They show both Goldman’s Fed scenario analysis and how the probability-weighted average of those scenarios compares to the bank’s base case, and market pricing both pre- and post-SVB.

The bottom line, from a 14-page note, was captured in this subheading: “The Inflation Fight Can Wait Six Weeks.” Although Mericle conceded that a pause this month is tantamount to taking a break from fighting inflation, he said that’s “hardly the problem it is made out to be,” especially when you conceptualize of the effort as a “multiyear project.”

Besides, he remarked, “the link between a single 25bps rate hike and the future path of inflation is quite tenuous, and the FOMC can always hike again at its next meeting in just six weeks.” Indeed, that’s still Goldman’s base case.

For now, though, “markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient,” and if you ask Goldman, that should be the overriding concern at this week’s policy gathering.