- The US will enter a recession – it’s just a matter of when and how badly, Citadel’s Ken Griffin warned.
- He urged the Fed to maintain its rate hikes so that high inflation does not lead to a wage-price spiral.
- U.S. stocks are holding up for now, but job losses could prompt a sell-off, the billionaire investor told CNBC.
Hedge fund billionaire Ken Griffin has warned that the United States will enter a recession – the only question is when and how painful it will be.
In an interview with CNBC, the Citadel founder also acknowledged that the Federal Reserve faces a difficult task in fighting inflation because interest rates are a “very brutal tool.” But he urged policymakers to keep rates rising aggressively to ensure high prices do not become accepted as the norm.
Griffin said on Wednesday that an economic slowdown now seems inevitable for the United States – especially in a “hard landing” scenario, where the Fed’s efforts to rein in soaring prices lead to higher unemployment and a slowdown in economic growth. the growth.
“Everyone likes to predict recessions, and there will be one,” he said during CNBC’s “Delivering Alpha” conference. “It’s just a matter of when, and frankly, how much.”
“Is it possible [that at the end] of ’23 we have a hard landing? Absolutely,” he added.
The US central bank has raised interest rates by 75 basis points in three consecutive meetings to rein in inflation, which is nearing 40-year highs. Rate hikes tend to make a recession more likely because they make borrowing more expensive, leading to lower spending and lower growth.
The billionaire investor said the Fed’s task was made more difficult by an unprecedented labor market and a “huge” amount of government spending.
“So the Fed has had a very tough job trying to use a very brutal tool – interest rates – to deal with an overheated economy where Washington continues to make moves across the board that have heated the oven. So it’s hard work,” he said. .
Griffin called on the Fed to continue its aggressive rate hikes to ensure it maintains a cap on what is considered a normal rate of inflation. Otherwise, persistently high levels could lead to higher wage demands, which fuel a wage-price spiral where repeated wage increases boost prices.
“We need to continue on the path we’ve taken to make sure we re-anchor inflation expectations,” Griffin said.
“There’s a psychological component to inflation that we need, to make sure our country doesn’t start assuming that we should be expecting 5, 6, or 7 percent inflation.
“Because once it is widely expected, it becomes reality. It becomes the table stake in salary negotiations, for example.”
Uncertainty over Fed monetary tightening and recession risks have weighed on US equities in 2022. The benchmark S&P 500 index has fallen 22.2% this year so far as stock markets have suffered a large liquidation.
But the losses are less than the 50% selloff predicted by market gurus like Jeremy Grantham and Michael Burry earlier in the year.
Griffin said the U.S. stock market is showing some resilience even in the face of high inflation and central bank interventions. He also faces the threat of Russia launching a nuclear war against Ukraine.
But the Citadel boss said he expects stocks to fall further, if a Fed-led recession leads to higher unemployment. This would lead individual investors to start pulling their money out of stocks and into less risky assets such as bonds.
“The market is – of course it’s down, I don’t want to sugarcoat that. But it’s not as low as you probably would have thought if you were watching the headlines,” he told CNBC.
“This, again, reflects [that] people have job security, they feel secure in their work. Because they are secure in their job, they are willing to risk their money in the stock market.
“If people started to hear their neighbors losing their jobs, we would see a rotation from equities to fixed income.”
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