A surprisingly hot U.S. inflation number has Wall Street taking stock of the Federal Reserve’s efforts to cool it — and some investors aren’t holding back.
Last week’s inflation shock cemented the view that the Fed will raise interest rates by at least 75 basis points at its meeting next week. But it will mean another outsized increase by the central bank for its fifth rate hike this year.
There are concerns that the Fed pays too much attention to the release of inflation data because they do not reflect what is happening at the time.
That delay means policymakers run the risk of overstretching at a time when the economy needs some relief — and that would hit stocks hard.
Here’s what six straight investors and Fed watchers are saying about its rate hike and the chances it will cause pain to the economy and markets.
1. Stanley Druckenmiller: The Fed’s sudden move after years of easy money signals a bleak outlook for stocks.
“Now they’re like reformed smokers,” Druckenmiller said. “They went from printing a bunch of money to like driving a Porsche at 200 miles an hour, not just taking your foot off the gas, but just slamming on the brakes,” he said.
“I mean there’s a high probability that the market will stagnate for 10 years at best,” the billionaire investor said.
2. Jeff Gundlach: Fed policymakers are on the verge of taking their tightening too far.
“I’ve been saying for a long time that the Fed does nothing but follow the 2-year Treasury yield. Now they’re driving the Fed Funds rate up to that level,” DoubleLine’s CEO said in a recent podcast. the company tweeted.
“Unfortunately, it looks like the Fed might overreach,” Gundlach said.
“The Fed is getting aggressive to the point where it’s turning the economy into a dumpster,” added Gundlach, whose nickname is the “Bond King.”
3. Barry Sternlicht: Another huge rate hike by the Fed will fuel a US recession and housing crash.
“If the Fed keeps it up, they’re going to have a serious recession and people are going to lose their jobs,” said billionaire real estate investor Sternlicht.
“You’ll see cracks everywhere,” he added.
The Fed is “attacking the economy with a sledgehammer [when] they don’t need to,” said the head of Starwood Capital Group.
4. Nassim Taleb: Zero interest rates have hurt the economy and now we need to get back to normal.
“We had 15 years, 14 and a half years of Disneyland, which basically destroyed the economic structure. Think about it: no interest rates,” said Taleb, author of the book “Black Swan.”
“With zero interest rates … you’re hurting the economy for a long time. You’re creating bubbles, you’re creating tumors like Bitcoin, you’re creating hedge funds that shouldn’t exist but have existed for 15 years.”
“So now we have to go back to normal economic life. People with experience remember that at some point there was such a thing as a discount rate … that your investment had to earn cash flows,” the former options trader said.
5. Mark Spitznagel: Fed hikes can cause assets to collapse and plunge the economy into a devastating recession.
“If the Fed tries to normalize rates, it will bring down inflation very, very quickly, but it will also cause devastation,” said the Universa Investments co-founder.
“Controlled burning can turn into a wildfire cascade,” Spitznagel said of the Fed’s tightening plan.
“That’s the real risk. And that’s what investors have to think about — not the type of losses that have occurred this year, but rather the type of losses that this could turn into. Where the Fed can’t really do anything to stop it.”
“We really should be more concerned about deflation. That’s a huge, huge risk that people don’t think about. If the Fed bursts this bubble, we’re going to be in a deflationary spiral.”
6. David Rosenberg: The Fed is too focused on inflation data when it should be giving the economy a break from hiking.
“Right now I would pause and take stock of the tightening that has already been put into the system,” said Rosenberg Research’s chief economist. “We talk about inflation all the time, but the economy is on its back right now.”
“They’re raising rates and shrinking the size of the balance sheet in a fairly dramatic way into an inverted yield curve. And that’s going to plant the seeds of a recession if we’re not already in one.”