Stanley Druckenmiller says the Fed is like a 'reformed smoker,' while Jeff Gundlach warns it's driving the US into a dumpster. 6 market experts talk straight about rate hikes.
- Hotter-than-expected inflation has prompted Wall Street to take stock of the Federal Reserve.
- With another jumbo rate hike on deck, investors worry the Fed risks a recession by going too far.
A surprisingly hot US inflation number has galvanized Wall Street into taking stock of the Federal Reserve's efforts to cool it — and some investors aren't holding back.
The inflation shock last week has cemented in the view the Fed will raise interest rates by at least 75 basis points at its meeting next week.But it will mean yet another oversized increase from the central bank for its fifth rate hike this year.
There are worries the Fed's paying too much attention to inflation data releases, because they don't reflect what's happening at the time.
That lag means policymakers run the risk of overtightening, at a point when the economy needs some relief — and that would hit stocks hard.
Here what six straight-talking investors and Fed watchers say about its interest-rate campaign and the chances it will cause pain for the economy and markets.
1. Stanley Druckenmiller: The Fed's abrupt shift after years of easy money signals a bleak outlook for stocks.
"Now they're like reformed smokers," Druckenmiller said. "They've gone from printing a bunch of money, like driving a Porsche at 200 miles an hour, by not only taking the foot off the gas, but just slamming the brakes on," he said.
"There's a high probability in my mind that the market, at best, is going to be kind of flat for 10 years," the billionaire investor said.
2. Jeff Gundlach: Fed policymakers are on the brink of going too far with tightening.
"I've been saying for a long time that the Fed does nothing but follows the 2-year Treasury yield. Now they are catching up the Fed Funds rate to that level," the DoubleLine CEO said on a recent podcast, the company tweeted.
"Unfortunately, looks like the Fed might overtighten," Gundlach said.
"The Fed is getting aggressive to the point that they oversteer the economy into the dumpster," added Gundlach, whose nickname is "Bond King".
3. Barry Sternlicht: More jumbo rate hikes from the Fed will spark a US recession and a housing crash.
"If the Fed keeps this up, they are going to have a serious recession and people will lose their jobs," billionaire real-estate investor Sternlicht said.
"You are going to see cracks everywhere," he added.
The Fed "is attacking the economy with a sledge hammer [when] they don't need to," the Starwood Capital Group boss said.
4. Nassim Taleb: Zero interest rates have hurt the economy, and now we need to get back to normal.
"We've had 15 years, 14 and a half years of Disneyland that basically has destroyed the economic structure. Think about it: No interest rates," Taleb, author of "The Black Swan", said.
"At zero interest rates … for long periods of time, you are hurting the economy. You're creating bubbles, creating tumors like bitcoin, creating hedge funds that should not exist, but have existed for 15 years."
"So now we need to go back to normal economic life. People with experience remember that there was at some point such a thing as a discount rate … that your investment had to earn cash flow," the former options trader said.
5. Mark Spitznagel: The Fed's hikes risk sparking an asset slump and tipping the economy into a devastating recession.
"If the Fed's going to try to normalize rates, they're going to bring inflation down very, very quickly, but it's also going to cause devastation," the cofounder of Universa Investments said.
"The controlled burn can turn into a wildfire cascade," Spitznagel said about the Fed's tightening plan.
"That is the real risk here. And that's what investors need to think about — not the type of losses that occurred this year, but rather the type of losses that this can turn into. Where the Fed actually can't do anything to stop it."
"We should really worry more about deflation. That's a huge, huge risk people are not thinking about. If the Fed pops this bubble, we will be in a deflationary spiral."
6. David Rosenberg: The Fed is too focused on inflation data, when it should give the economy a break from hikes.
"I'd be pausing right now and assessing the tightening that's already been put into the system," the chief economist of Rosenberg Research said. "We're talking incessantly about inflation, but the economy is flat on its back right now."
"They're raising rates and reducing the size of the balance sheet in a rather dramatic fashion into an inverted yield curve. And that is going to sow the seeds of a recession, if we're not already in one."
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